CFFN September 30, 2006 10K
UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended September 30, 2006 OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
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ACT
OF 1934
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For
the transition period from
_____________________to_____________________
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Commission
file number 000-25391
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CAPITOL
FEDERAL FINANCIAL
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(Exact
name of registrant as specified in its charter)
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United
States
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48-1212142
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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700
Kansas Avenue, Topeka, Kansas
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66603
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(785) 235-1341
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Securities
Registered Pursuant to Section 12(b) of the Act:
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Common
Stock, par value $.01 per share The
Nasdaq Stock Market LLC
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(Title
of class) (Exchange
on
which registered)
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Securities
Registered Pursuant to Section 12(g)
of the Act:
None
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act. þ
Yes ¨
No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 of Section 15(d) of the Act. ¨
Yes þ
No
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Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15(d) of the
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Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter
period that the registrant was required to file
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such
reports) and (2) has been subject to such filing requirements for
the past
90 days. þ
Yes ¨
No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K is not contained herein, and
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will
not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by
reference
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in
Part III of this Form 10-K or any amendment to this Form 10-K.
þ
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Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
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“accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Act). ¨
Yes þ
No
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The
aggregate market value of the voting
and non-voting stock held by non-affiliates of the registrant, computed
by
reference to the
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average
of the closing bid and asked price of such stock on the
NASDAQ Stock Market as of March 31, 2006, was $707.5 million.
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The
exclusion from such amount of the market value of the shares owned
by any
person shall not be deemed an admission by the
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Registrant
that such person is an affiliate of the registrant.
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As
of December 1, 2006, there were issued and outstanding 74,113,855
shares
of the Registrant’s common stock.
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DOCUMENTS
INCORPORATED BY REFERENCE
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Parts
II and IV of Form 10-K - Portions of the Annual Report to Stockholders
for
the year ended September 30, 2006.
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Part
III of Form 10-K - Portions of the proxy statement for the Annual
Meeting
of Stockholders for the year ended September
30, 2006.
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Page No.
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PART
I
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Item
1.
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4
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Item
1A.
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36
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Item
1B.
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38
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Item
2.
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38
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Item
3.
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38
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Item
4.
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38
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PART
II
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Item
5.
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39
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Item
6.
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39
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Item
7.
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39
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Item
7A.
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39
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Item
8.
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39
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Item
9.
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39
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Item 9A.
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40
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Item
9B.
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40
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PART
III
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Item
10.
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40
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Item
11.
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40
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Item
12.
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41
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Item
13.
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41
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Item
14.
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41
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PART IV
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Item
15.
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42
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43
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Capitol
Federal Financial
(the “Company”), and its wholly-owned subsidiary, Capitol Federal Savings Bank
(“Capitol Federal Savings” or the “Bank”), may from time to time make written or
oral “forward-looking statements”, including statements contained in the
Company’s 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 the Company’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
future results to differ materially from the plans, objectives, goals,
expectations, anticipations, estimates and intentions expressed in the
forward-looking statements:
· |
our
ability to continue to maintain overhead costs at reasonable levels;
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· |
our
ability to continue to originate a significant volume of one- to
four-family mortgage loans in our market
area;
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· |
our
ability to acquire funds from or invest funds in wholesale or secondary
markets;
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· |
the
future earnings and capital levels of the Bank, which could affect
the
ability of the Company to pay dividends in accordance with its dividend
policies;
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· |
the
credit risks of lending and investing activities, including changes
in the
level and direction of loan delinquencies and write-offs and changes
in
estimates of the adequacy of the allowance for loan
losses;
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· |
the
strength of the U.S. economy in general and the strength of the local
economies in which we conduct
operations;
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· |
the
effects of, and changes in, trade, monetary and fiscal policies and
laws,
including interest rate policies of the Board of Governors of the
Federal
Reserve System;
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· |
the
effects of, and changes in, foreign and military policies of the
United
States Government;
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· |
inflation,
interest rate, market and monetary fluctuations;
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· |
our
ability to access cost-effective
funding;
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· |
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;
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· |
the
willingness of users to substitute competitors’ products and services for
our products and services;
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· |
our
success in gaining regulatory approval of our products and services,
when
required;
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· |
the
impact of changes in financial services laws and regulations, including
laws concerning taxes, banking, securities and
insurance;
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· |
acquisitions
and dispositions;
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· |
changes
in consumer spending and saving habits;
and
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· |
our
success at managing the risks involved in our
business.
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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 the Company or the Bank.
As
used
in this Form 10-K, unless we specify otherwise, “the Company,” “we,” “us,” and
“our” refer to Capitol Federal Financial, a United States corporation. “Capitol
Federal Savings,” and ”the Bank,” refer to Capitol Federal Savings Bank, a
federal savings bank and the wholly-owned subsidiary of Capitol Federal
Financial. “MHC” refers to Capitol Federal Savings Bank MHC, a mutual holding
company and majority-owner of Capitol Federal Financial.
PART
I
General
The
Company is a federally chartered mid-tier mutual holding company incorporated
in
March 1999. The Bank is a wholly-owned subsidiary of the Company, which is
majority owned by Capitol Federal Savings Bank MHC (“MHC”), a federally
chartered mutual holding company. The Company’s common stock is traded on
the
Global Select tier of the NASDAQ Stock Market under the symbol
“CFFN.”
The
Bank
is the only operating subsidiary of the Company. The 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 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 through 29 traditional and
nine
in-store banking offices. At
September 30, 2006, we had total assets of $8.20 billion, deposits of $3.90
billion and total equity of $863.2 million.
We
have
been, and intend to continue to be, a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities
we
serve. We attract retail deposits from the general public and invest those
funds
primarily in permanent loans secured by first mortgages on owner-occupied,
one-
to four-family (“single-family") residences. We also originate consumer loans,
loans secured by first mortgages on nonowner-occupied one- to four-family
residences, permanent and construction loans secured by one- to four-family
residences, commercial real estate loans and multi-family real estate loans.
While our primary business is the origination of one- to four-family mortgage
loans funded through retail deposits, we also purchase one- to four-family
mortgage loans from nationwide lenders and correspondent lenders located within
our Kansas City and Wichita market areas and market areas within our geographic
region, and invest in certain investment and mortgage-related securities funded
through retail deposits and advances from Federal Home Loan Bank Topeka
(“FHLB”). We may originate loans outside our market area on occasion, and most
of the whole loans we purchase are secured by properties located outside of
our
market area.
Our
revenues are derived principally from interest on loans and mortgage-related
securities and interest and dividends on investment securities. Our primary
sources of funds are customer deposits, borrowings, scheduled amortization
and
prepayments of mortgage loan principal and mortgage-backed securities and calls
and maturities of investment securities and funds provided by
operations.
We
offer
a variety of deposit accounts having a wide range of interest rates and terms,
which generally include passbook and passcard savings accounts, money market
accounts, interest bearing and non-interest bearing checking accounts and
certificates of deposit with terms ranging from 91 days to 96 months.
Our
executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603,
and our telephone number at that address is (785) 235-1341.
Available
Information
Our
Internet website address is www.capfed.com. Financial information, including
our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and all amendments to those reports can be obtained free of charge
from
our website. The above reports are available on our website as soon as
reasonably practicable after they are electronically filed with or furnished
to
the SEC. These reports are also available on the SEC’s website at http://www.sec.gov.
Market
Area and Competition
Our
corporate office is located in Topeka, Kansas. We have a network of 38 branches
located in 8 counties throughout the State of Kansas. We operate in three
primary market areas: Johnson County, Kansas, the city of Wichita, Kansas and
the cities of Topeka and Lawrence, Kansas. In addition to providing full service
banking offices, we also provide our customers telephone and Internet banking
capabilities. Management considers our strong retail banking network, together
with our reputation for financial strength and customer service, as our major
strengths in attracting and retaining customers in our market
areas.
Johnson
County, Kansas is located in the south central area of the Kansas City
metropolitan area. According to the U.S. Census Bureau Population Estimates
Program, Johnson County’s population increased approximately 12% from 2000 to
2005. Johnson County’s economy is well diversified. The 2005 inflation-adjusted
local median household income in Johnson County was estimated to be $67 thousand
compared to the estimated national average of $46 thousand and the estimated
Kansas average of $43 thousand as reported by the U.S. Census Bureau. The
Johnson County market represents the greatest concentration of the Bank’s retail
operations, both lending and deposit gathering. Approximately half of the Bank’s
branches are located in the Johnson County market. The Bank ranked first in
deposit market share in Johnson County, with 12.1% market share based on the
FDIC “Summary of Deposits - Market Share Report” dated June 30, 2006. The Bank’s
market share percentage in Johnson County has been decreasing over the past
5
years, but we have continued to rank first in total deposit market share each
of
those years. The decrease in market share percentage has been a result of
aggressive pricing in the market by other financial institutions and the
entrance of new competitors such as credit unions, de novo institutions and
increased banking locations. The Bank is consistently one of the top three
lenders in Johnson County with regards to loan volume. We believe Johnson
County’s highly diversified economy reduces our potential to a downturn in one
or a handful of economic sectors.
Wichita
is the largest city in Kansas. Approximately 70% of the U.S. general aviation
aircraft is produced in Wichita. The Bank’s second greatest concentration in
retail operations is in Wichita. The Bank has six branches located in Wichita,
which is located in Sedgwick County. The Bank ranked seventh in deposit market
share in Wichita, with 6.2% market share based on the FDIC “Summary of Deposits
- Market Share Report” dated June 30, 2006. The Bank’s market share percentage
and overall market ranking in Wichita has decreased over the past 5 years as
a
result of aggressive pricing by competitors and an increased number of financial
institutions and banking locations. The decline in commercial airline and
general aviation airplane sales following the 2001 terrorist attacks on the
United States has had an impact on the Wichita-area economy, but we have not
felt the impact of that downturn in the credit quality of our loan portfolio
in
Wichita. We believe this is a result of the majority of families having dual
incomes and the gradual appreciation in the value of homes in Wichita. The
Bank
is consistently one of the top five lenders in Sedgwick County with regards
to
loan volume.
Topeka
is
the Kansas state capital and therefore houses numerous state agencies. The
University of Kansas is located in Lawrence. Topeka and Lawrence represent
the
third greatest concentration of the Bank’s retail operations. The Bank has six
branches, including the home office, located in Topeka and four branches located
in Lawrence. The Bank ranked first in deposit market share in Topeka and
Lawrence combined, with 33.0% market share based on the FDIC “Summary of
Deposits - Market Share Report” dated June 30, 2006. The Bank’s market share
percentage has been decreasing over the past 5 years, but we have continued
to
rank first in total deposit market share each of those years. The reason for
the
decrease in market share is the same as in our other major market areas. The
Bank is consistently one of the top three lenders in this market area with
regards to loan volume.
Deposit
market share is measured by total deposits, without consideration for type
of
deposit. We do not have commercial deposit accounts because of our focus on
retail deposits, while many of our competitors have both commercial and retail
deposits in their total deposit base. This will tend to show the Bank
underperforming in this category compared to other institutions in our market
areas. We have lost market share when measured by total deposits.
We
are
one of the largest originators of one- to four-family mortgage loans in the
state of Kansas. We attract customers through our strong relationships with
real
estate agents, our reputation, pricing, existing and walk-in customers and
customers that apply on the Internet. Competition in originating one- to
four-family mortgage loans primarily comes from other savings institutions,
commercial banks, credit unions and mortgage bankers. Other savings
institutions, commercial banks, credit unions and finance companies provide
vigorous competition in consumer lending.
We
purchase one- to four-family mortgage loans from nationwide lenders and
correspondent lenders located within our Kansas City and Wichita market areas
and market areas within our geographic region. Purchasing loans from nationwide
lenders provides geographic diversification, reducing our exposure to
concentrations of credit risk. At September 30, 2006 all loans purchased from
nationwide lenders were secured by properties located in 48 states, including
Kansas, and Washington, D.C. At September 30, 2006, purchases from nationwide
lenders in the following states comprised greater than 5% of total loans
purchased from nationwide lenders: Illinois 13.9%; Florida 7.5%; Arizona 6.0%;
Texas 5.7%, and Virginia 5.5%.
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 consumer loans,
construction loans secured by residential properties, commercial properties
and
multi-family real estate and loans secured by multi-family dwellings or
commercial properties. 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,
2006, our net loan portfolio totaled $5.22 billion, which constituted 63.7%
of
our total assets. For a discussion of our market risk associated with loans,
see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report
to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
All
originated loans are generated by our own employees or loan agents. Loans over
$500 thousand must be underwritten by two senior level underwriters. Any
mortgage loan over $750 thousand must be approved by the Asset and Liability
Management Committee (“ALCO”) and loans over $1.5 million must be approved by
the board of directors. For loans requiring ALCO and/or board of directors’
approval, management is responsible for presenting to the ALCO and/or board
of
directors information about the creditworthiness of the borrower and the
estimated value of the subject property. Information pertaining to the
creditworthiness of the borrower generally consists of a summary of the
borrower’s credit history, employment, 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, 2006, the maximum amount which we could have loaned to any one
borrower and the borrower’s related entities was approximately $116.9 million.
Our largest lending relationship to a single borrower or a group of related
borrowers on that date consisted of 14 multi-family real estate projects, two
single-family homes and four commercial real estate projects located in Kansas
and Texas, totaling $33.6 million. No single loan in this group exceeded $3.7
million at that date. Most of the multi-family real estate loans qualify for
the
low income housing tax credit program. We have 25 years experience with this
group of borrowers, who usually build and manage their own properties. All
of
these loans were current and performing in accordance with their terms at
September 30, 2006.
The
second largest lending relationship at September 30, 2006, consisted of eight
loans totaling $13.5 million. Four loans are secured by multi-family real estate
units and four are secured by single-family homes. We have 25 years of
experience with the borrowers. All units were built and are presently being
managed by the borrowers. Each of the loans to this group of borrowers were
current and performing in accordance with required terms at September 30, 2006.
Loan
Portfolio.
The
following table presents information concerning the composition of our loan
portfolio in dollar amounts and in percentages (before deductions for loans
in
process, net deferred fees and discounts and allowances for losses) as of the
dates indicated.
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September
30,
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2006
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2005
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2004
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2003
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2002
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars
in thousands)
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Real
Estate Loans:
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One-
to four-family
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$
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4,931,505
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93.80
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%
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$
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5,189,006
|
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94.44
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%
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$
|
4,492,205
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93.70
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%
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$
|
4,069,197
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93.43
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%
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$
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4,612,543
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93.94
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%
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Multi-family
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48,331
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0.92
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40,636
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0.74
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35,421
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0.74
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38,464
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0.88
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45,985
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0.94
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Commercial
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8,443
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|
0.16
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8,927
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0.16
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8,698
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0.18
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7,881
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0.18
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5,514
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0.11
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Construction
and development(1)
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45,452
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0.87
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45,312
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0.83
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54,782
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1.14
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48,537
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1.11
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48,023
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0.98
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Total
real estate loans
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5,033,731
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95.75
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5,283,881
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96.17
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4,591,106
|
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95.76
|
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4,164,079
|
|
|
95.60
|
|
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4,712,065
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|
|
95.97
|
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|
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Other
Loans:
|
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Consumer
Loans:
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Savings
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6,250
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0.12
|
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8,377
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0.15
|
|
|
9,141
|
|
|
0.19
|
|
|
10,963
|
|
|
0.25
|
|
|
11,931
|
|
|
0.24
|
|
Automobile
|
|
|
3,660
|
|
|
0.07
|
|
|
2,555
|
|
|
0.05
|
|
|
2,274
|
|
|
0.05
|
|
|
3,798
|
|
|
0.09
|
|
|
6,913
|
|
|
0.14
|
|
Home
equity
|
|
|
210,008
|
|
|
3.99
|
|
|
197,626
|
|
|
3.60
|
|
|
189,861
|
|
|
3.96
|
|
|
173,656
|
|
|
3.99
|
|
|
175,551
|
|
|
3.58
|
|
Other
|
|
|
3,762
|
|
|
0.07
|
|
|
1,878
|
|
|
0.03
|
|
|
1,931
|
|
|
0.04
|
|
|
2,484
|
|
|
0.07
|
|
|
3,474
|
|
|
0.07
|
|
Total
consumer loans
|
|
|
223,680
|
|
|
4.25
|
|
|
210,436
|
|
|
3.83
|
|
|
203,207
|
|
|
4.24
|
|
|
190,901
|
|
|
4.40
|
|
|
197,869
|
|
|
4.03
|
|
Commercial
business loans
|
|
|
62
|
|
|
--
|
|
|
70
|
|
|
--
|
|
|
129
|
|
|
--
|
|
|
201
|
|
|
--
|
|
|
151
|
|
|
--
|
|
Total
other loans
|
|
|
223,742
|
|
|
4.25
|
|
|
210,506
|
|
|
3.83
|
|
|
203,336
|
|
|
4.24
|
|
|
191,102
|
|
|
4.40
|
|
|
198,020
|
|
|
4.03
|
|
Total
loans receivable
|
|
|
5,257,473
|
|
|
100.00
|
%
|
|
5,494,387
|
|
|
100.00
|
%
|
|
4,794,442
|
|
|
100.00
|
%
|
|
4,355,181
|
|
|
100.00
|
%
|
|
4,910,085
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in process
|
|
|
22,605
|
|
|
|
|
|
14,803
|
|
|
|
|
|
23,623
|
|
|
|
|
|
27,039
|
|
|
|
|
|
21,764
|
|
|
|
|
Net
deferred fees and discounts
|
|
|
9,318
|
|
|
|
|
|
10,856
|
|
|
|
|
|
18,794
|
|
|
|
|
|
15,896
|
|
|
|
|
|
15,678
|
|
|
|
|
Allowance
for losses
|
|
|
4,433
|
|
|
|
|
|
4,598
|
|
|
|
|
|
4,495
|
|
|
|
|
|
4,550
|
|
|
|
|
|
4,825
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
5,221,117
|
|
|
|
|
$
|
5,464,130
|
|
|
|
|
$
|
4,747,530
|
|
|
|
|
$
|
4,307,696
|
|
|
|
|
$
|
4,867,818
|
|
|
|
|
(1)
At
September
30, 2006, there were no development loans in the loan
portfolio.
The
following table shows the composition of our loan portfolio by fixed- and
adjustable-rate loans at the dates indicated.
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
Fixed-Rate
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
3,031,734
|
|
|
57.67
|
%
|
$
|
3,273,627
|
|
|
59.58
|
%
|
$
|
3,118,912
|
|
|
65.06
|
%
|
$
|
3,005,475
|
|
|
69.01
|
%
|
$
|
3,418,360
|
|
|
69.62
|
%
|
Multi-family
|
|
|
47,669
|
|
|
0.91
|
|
|
40,100
|
|
|
0.73
|
|
|
34,828
|
|
|
0.73
|
|
|
37,819
|
|
|
0.87
|
|
|
44,494
|
|
|
0.91
|
|
Commercial
|
|
|
8,407
|
|
|
0.16
|
|
|
8,887
|
|
|
0.16
|
|
|
8,654
|
|
|
0.18
|
|
|
7,834
|
|
|
0.18
|
|
|
4,996
|
|
|
0.10
|
|
Construction
and development(1)
|
|
|
30,685
|
|
|
0.58
|
|
|
26,418
|
|
|
0.49
|
|
|
38,058
|
|
|
0.79
|
|
|
36,588
|
|
|
0.84
|
|
|
31,944
|
|
|
0.65
|
|
Total
real estate loans
|
|
|
3,118,495
|
|
|
59.32
|
|
|
3,349,032
|
|
|
60.96
|
|
|
3,200,452
|
|
|
66.76
|
|
|
3,087,716
|
|
|
70.90
|
|
|
3,499,794
|
|
|
71.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
67,021
|
|
|
1.27
|
|
|
39,617
|
|
|
0.72
|
|
|
26,439
|
|
|
0.55
|
|
|
26,817
|
|
|
0.62
|
|
|
38,828
|
|
|
0.79
|
|
Commercial
business
|
|
|
62
|
|
|
--
|
|
|
70
|
|
|
--
|
|
|
129
|
|
|
--
|
|
|
201
|
|
|
--
|
|
|
151
|
|
|
--
|
|
Total
fixed-rate loans
|
|
|
3,185,578
|
|
|
60.59
|
|
|
3,388,719
|
|
|
61.68
|
|
|
3,227,020
|
|
|
67.31
|
|
|
3,114,734
|
|
|
71.52
|
|
|
3,538,773
|
|
|
72.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-Rate
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
1,899,771
|
|
|
36.13
|
|
|
1,915,379
|
|
|
34.86
|
|
|
1,373,293
|
|
|
28.64
|
|
|
1,063,722
|
|
|
24.42
|
|
|
1,194,183
|
|
|
24.32
|
|
Multi-family
|
|
|
662
|
|
|
0.02
|
|
|
536
|
|
|
0.01
|
|
|
593
|
|
|
0.01
|
|
|
645
|
|
|
0.01
|
|
|
1,491
|
|
|
0.03
|
|
Commercial
|
|
|
36
|
|
|
--
|
|
|
40
|
|
|
--
|
|
|
44
|
|
|
--
|
|
|
47
|
|
|
--
|
|
|
518
|
|
|
0.01
|
|
Construction
and development(1)
|
|
|
14,767
|
|
|
0.28
|
|
|
18,894
|
|
|
0.34
|
|
|
16,724
|
|
|
0.35
|
|
|
11,949
|
|
|
0.28
|
|
|
16,079
|
|
|
0.33
|
|
Total
real estate loans
|
|
|
1,915,236
|
|
|
36.43
|
|
|
1,934,849
|
|
|
35.21
|
|
|
1,390,654
|
|
|
29.00
|
|
|
1,076,363
|
|
|
24.71
|
|
|
1,212,271
|
|
|
24.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
156,659
|
|
|
2.98
|
|
|
170,819
|
|
|
3.11
|
|
|
176,768
|
|
|
3.69
|
|
|
164,084
|
|
|
3.77
|
|
|
159,041
|
|
|
3.24
|
|
Total
adjustable-rate loans
|
|
|
2,071,895
|
|
|
39.41
|
|
|
2,105,668
|
|
|
38.32
|
|
|
1,567,422
|
|
|
32.69
|
|
|
1,240,447
|
|
|
28.48
|
|
|
1,371,312
|
|
|
27.93
|
|
Total
loans
|
|
|
5,257,473
|
|
|
100.00
|
%
|
|
5,494,387
|
|
|
100.00
|
%
|
|
4,794,442
|
|
|
100.00
|
%
|
|
4,355,181
|
|
|
100.00
|
%
|
|
4,910,085
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in process
|
|
|
22,605
|
|
|
|
|
|
14,803
|
|
|
|
|
|
23,623
|
|
|
|
|
|
27,039
|
|
|
|
|
|
21,764
|
|
|
|
|
Net
deferred fees and discounts
|
|
|
9,318
|
|
|
|
|
|
10,856
|
|
|
|
|
|
18,794
|
|
|
|
|
|
15,896
|
|
|
|
|
|
15,678
|
|
|
|
|
Allowance
for loan losses
|
|
|
4,433
|
|
|
|
|
|
4,598
|
|
|
|
|
|
4,495
|
|
|
|
|
|
4,550
|
|
|
|
|
|
4,825
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
5,221,117
|
|
|
|
|
$
|
5,464,130
|
|
|
|
|
$
|
4,747,530
|
|
|
|
|
$
|
4,307,696
|
|
|
|
|
$
|
4,867,818
|
|
|
|
|
(1) At
September 30, 2006, there were no development loans in the loan
portfolio.
|
|
|
|
Multi-family
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
One-
to Four-Family
|
|
Commercial
|
|
Construction
(2)
|
|
Consumer
|
|
Business
|
|
Total
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
|
|
(Dollars
in thousands)
|
|
Amounts
due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year(1)
|
|
$
|
827
|
|
|
6.80
|
%
|
$
|
--
|
|
|
--
|
%
|
$
|
22,037
|
|
|
5.80
|
%
|
$
|
3,551
|
|
|
6.26
|
%
|
$
|
--
|
|
|
--
|
%
|
$
|
26,415
|
|
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
through five years
|
|
|
29,257
|
|
|
6.11
|
|
|
554
|
|
|
7.64
|
|
|
810
|
|
|
6.38
|
|
|
10,316
|
|
|
7.21
|
|
|
27
|
|
|
7.00
|
|
|
40,964
|
|
|
6.41
|
|
After
five years
|
|
|
4,901,421
|
|
|
5.41
|
|
|
56,220
|
|
|
6.47
|
|
|
--
|
|
|
--
|
|
|
209,813
|
|
|
8.40
|
|
|
35
|
|
|
6.50
|
|
|
5,167,489
|
|
|
5.54
|
|
Total
due after one year
|
|
|
4,930,678
|
|
|
5.41
|
|
|
56,774
|
|
|
6.48
|
|
|
810
|
|
|
6.38
|
|
|
220,129
|
|
|
8.34
|
|
|
62
|
|
|
6.72
|
|
|
5,208,453
|
|
|
5.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
4,931,505
|
|
|
5.41
|
%
|
$
|
56,774
|
|
|
6.48
|
%
|
$
|
22,847
|
|
|
5.82
|
%
|
$
|
223,680
|
|
|
8.31
|
%
|
$
|
62
|
|
|
6.72
|
%
|
|
5,234,868
|
|
|
5.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,318
|
|
|
|
|
Allowance
for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,433
|
|
|
|
|
Total
loans receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,221,117
|
|
|
|
|
(2)
Construction loans are presented based upon the term to complete
construction.
The
following table presents, as of September 30, 2006, the amount of loans due
after September 30, 2007, and whether these loans have fixed or adjustable
interest rates.
|
|
Fixed
|
|
Adjustable
|
|
Total
|
|
Real
Estate Loans:
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
3,030,953
|
|
$
|
1,899,725
|
|
$
|
4,930,678
|
|
Multi-family
and Commercial
|
|
|
56,075
|
|
|
699
|
|
|
56,774
|
|
Construction
|
|
|
810
|
|
|
--
|
|
|
810
|
|
Consumer
|
|
|
63,722
|
|
|
156,407
|
|
|
220,129
|
|
Commercial
Business
|
|
|
62
|
|
|
--
|
|
|
62
|
|
Total
|
|
$
|
3,151,622
|
|
$
|
2,056,831
|
|
$
|
5,208,453
|
|
One-
to Four-Family Residential Real Estate Lending.
We
focus our lending efforts primarily on the origination and purchase of loans
secured by first mortgages on owner-occupied one- to four-family residences
in
our market areas. We generate additional lending volume by purchasing whole
one-
to four-family mortgage loans from nationwide lenders. These purchases allow
us
to attain geographic diversification and manage credit concentration risks
in
our loan portfolio. At September 30, 2006, one- to four-family mortgage loans
totaled $4.93 billion, or 93.8% of our total loan portfolio.
We
generally underwrite our loans using an automated underwriting system developed
by a third party, which closely resembles our manual underwriting standards,
with emphasis on the applicant’s credit history, employment and income history,
asset reserves and loan-to-value ratio. All information used for an automated
decision is validated with supporting documentation. Loans that do not meet
our
automated underwriting standards are referred to a staff underwriter for manual
underwriting. Presently, we lend up to 103% of the lesser of the appraised
value
or purchase price for one- to four-family mortgage loans. At September 30,
2006,
less than 1% of our loan portfolio had a loan-to-value ratio greater than 100%.
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 generally
require our borrowers to obtain title insurance, hazard insurance and flood
insurance, if necessary, in an amount not less than the value of the property
and improvements. We require borrowers to maintain escrow accounts for property
taxes with the Bank if their loan-to-value ratio exceeds 80%.
We
originate one- to four-family mortgage loans on either a fixed or
adjustable-rate basis, as consumer demand dictates. We primarily originate
fixed-rate one- to four-family mortgage loans in our market areas. We purchase
both fixed- and adjustable-rate one- to four-family loans, but we primarily
purchase one- to four-family adjustable-rate mortgage (“ARM”) loans to
supplement our ARM portfolio. At September 30, 2006, our fixed-rate one- to
four-family mortgage loan portfolio totaled $3.03 billion, or 57.7% of our
total
loan portfolio. At that date the ARM one- to four-family loan portfolio totaled
$1.90 billion, or 36.1% of our total loan portfolio.
Our
pricing strategy for mortgage loans includes setting interest rates that are
competitive with the Federal National Mortgage Association (“FNMA”) or the
Federal Home Loan Mortgage Corporation (“FHLMC”) and local financial
institutions, and consistent with our internal needs. ARM loans are offered
with
either a one-year, three-year, five-year or seven-year term to the initial
repricing date. After the initial period, the interest rate for each ARM loan
generally adjusts annually for the remainder of the term of the loan. We use
a
number of different indices to reprice our ARM loans.
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. However,
these loans normally remain outstanding 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 mortgage
loan
in our portfolio considerably. Our one- to four-family mortgage loans are
generally not assumable and do not contain prepayment penalties. 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 ARM loans are fully amortizing loans with contractual maturities
of up to 30 years, with payments due monthly. Our current ARM loans generally
provide for specified minimum and maximum interest rates,
with
a
lifetime cap and floor, a limit on the periodic adjustment on the interest
rate
over the rate in effect prior to adjustment and do not permit negative
amortization of principal. As a consequence of using caps, the interest rates
on
these loans may not be as rate sensitive as our cost of funds. We also offer
interest-only ARM loans that do not require principal payments for a period
of
up to ten years. At September 30, 2006, 8.5% of our loan portfolio consisted
of
interest-only ARM loans. As of September 30, 2006, approximately 83% of our
interest-only ARM loans were purchased from nationwide lenders. Loan repayment
schedules are determined at the repricing date for the remaining term of the
ARM
loan. Our ARM loans are not automatically convertible into fixed-rate loans.
We
do allow borrowers to pay a modification fee to convert an ARM loan to a
fixed-rate loan. As of September 30, 2006, we have not experienced performance
problems with our interest-only loans. See “Loan Originations, Purchases, Sales
and Repayments.”
In
order
to remain competitive in its market areas, the Bank currently originates ARM
loans at introductory rates that are in effect until the first repricing date.
The Bank qualifies borrowers based on this initial discounted rate for our
three, five and seven year ARM loans. For our interest-only loans, the Bank
qualifies the borrower at the fully indexed rate. ARM loans can pose different
credit risks than fixed-rate loans, primarily because as interest rates rise,
the borrower’s monthly payment also rises, increasing the likelihood of default.
This specific risk type is known as repricing risk. An increasing rate
environment is not a favorable scenario for borrowers with ARM loans. In the
current economic environment, repricing risk is an especially valid concern
because the Federal Reserve has indicated that inflationary concerns were a
factor behind many recent rate increases. The Federal Reserve has recently
halted additional rate increases but has indicated that the halt may be
temporary, citing potential remaining inflationary concerns. Except for our
variable rate equity loans, we do not have loans that price off of indices
directly related to the actions of the Federal Reserve.
ARM
loans
can pose different credit risks than fixed-rate loans, primarily because as
interest rates rise the borrower’s payment also rises, increasing the potential
for default. Historically, we have not experienced increased delinquencies
with
these loans in a rising rate environment. See “Asset
Quality - Non-performing Assets” and “Asset
Quality - Classified Assets.”
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 and small office buildings
generally located in our market areas. At September 30, 2006, multi-family
and
commercial real estate loans totaled $56.8 million, or 1.1% of our total 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 ARM 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
usually do not exceed 80% of the appraised value of the property securing the
loan. 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
generally do not maintain a tax or insurance escrow account for loans secured
by
multi-family or commercial real estate. In order to monitor the adequacy of
cash
flows on income-producing properties of $1.5 million or more, the borrower
is
notified annually to provide financial information including rental rates and
income, maintenance costs and an update of real estate property tax payments,
as
well as personal financial information.
Loans
secured by multi-family and commercial real estate properties generally are
larger and involve a greater degree of credit risk than one- to four-family
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
Lending.
At
September 30, 2006, we had $45.5 million in construction permanent loans
outstanding, representing 0.9% of our total loan portfolio. We originate
construction loans primarily secured by one- to four-family residential real
estate. Presently, all of the loans are secured by property located within
our
market areas. None of these loans were made to builders for speculative
purposes. Construction loans are obtained principally by homeowners who will
occupy the property when construction is complete. The application process
includes submission of complete plans, specifications and costs of the project
to be constructed. These items are used as a basis to determine the appraised
value of the subject property. 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.
Consumer
Lending.
Consumer loans generally have shorter terms to maturity or reprice more
frequently, which reduces our exposure to changes in interest rates, and usually
carry higher rates of interest than do one- to four-family 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, 2006, our consumer loan portfolio totaled $223.7 million, or
4.3%
of our total 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 originate 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
4.0% of our total loan portfolio, or $210.0 million at September 30, 2006.
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.
As
of September 30, 2006, 4.0% of the home equity portfolio was interest only.
In
order to minimize risk of loss, home equity loans of 90% or greater of the
value
of the property require private mortgage insurance. The term-to-maturity
of our home equity and home improvement loans may be up to 20 years. Home equity
lines of credit have no stated term-to-maturity and require the payment of
1
1/2% of the outstanding loan balance per month, which may be reborrowed at
any
time. Other consumer loan terms vary according to the type of collateral and
the
length of contract. The majority of our consumer loan portfolio is comprised
of
home equity lines of credit, which have interest rates that can adjust monthly
based upon changes in the prime rate, to a maximum of 18%. Since May 2006,
the
Bank has not increased the rates on existing home equity loans, despite the
increase in the Prime rate. This action was taken to retain home equity loans
that might otherwise have been refinanced.
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 their ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security in relation
to
the proposed loan amount.
Consumer
loans may entail greater risk than do one- to four-family mortgage loans,
particularly in the case of consumer loans that 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 and fixed-rate loans, our ability to originate loans is
dependent upon customer demand for loans in our market areas. Demand is affected
by the local housing market, competition and the interest rate environment.
During the 2006 and 2005 fiscal years, we originated and refinanced $148.0
million and $194.8 million of one- to four-family ARM loans, and $497.5 million
and $514.0 million of one- to four-family fixed-rate mortgage loans,
respectively.
In
an
effort to offset the impact of repayments and to retain our customers, we offer
existing loan customers the opportunity to modify their original loan terms
to
terms generally consistent with those currently being offered in our market
areas. This program helps ensure that we maintain the relationship with the
customer and significantly reduces the amount of time it takes for borrowers
to
obtain current market pricing and terms without having to refinance their
loan.
We
purchase one- to four-family mortgage loans from nationwide lenders to reduce
our risk of geographic concentration and to supplement our one- to four-family
ARM loan origination volume as ARM loans are not considered as attractive to
borrowers as fixed-rate mortgage loans in our local markets. The seller retains
the servicing of these loans. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition” in the
Annual Report to Stockholders attached as Exhibit 13 to this Annual Report
on
Form 10-K. At September 30, 2006, our purchased loan portfolio from nationwide
lenders totaled $1.12 billion, or 21.3% of our total loan portfolio.
The
underwriting standards of the lenders from whom the Bank purchases loans are
substantially similar to the Bank’s internal underwriting standards. Lenders are
required to fully document all data sources for each application. “No Doc” or
“Stated Income, Stated Assets” loans are not permitted. We believe these
requirements reduce the credit risk associated with the loans we purchase.
Before committing to purchase a pool of loans, the Bank’s Chief Lending Officer
or Secondary Marketing Manager reviews specific criteria such as loan amount,
credit scores, loan-to-value ratios, geographic location, and debt ratios of
each loan in the pool. If the specific criteria do not meet the Bank’s
underwriting standards and compensating factors are not sufficient, then a
loan
may be removed from the pool. Once the review of the specific criteria is
complete and loans not meeting the Bank’s standards are removed from the pool,
changes are sent back to the lender for acceptance and pricing. Before the
pool
is funded, an approved Bank loan underwriter reviews 25% of the loan files
and
the supporting documentation in the pool. If a loan does not meet the Bank’s
underwriting standards for these loans, it is removed from the pool prior to
funding.
During
the 2006 and 2005 fiscal years, we purchased $165.3 million and $671.4 million
of one- to four-family ARM loans and $12.8 million and $75.7 million of one-
to
four-family fixed-rate loans, respectively, from nationwide lenders. Included
in
the fiscal years 2006 and 2005 ARM loan volume was $73.9 million and $397.0
million, respectively, of interest-only loans. These loans do not typically
require principal payments during their initial term. Of the interest-only
loans
purchased during the 2006 and 2005 fiscal years, approximately 59.4% of these
loans do not require principal payments for five years and the other 40.6%
do
not require principal payments for ten years. Loans of this type generally
are
considered to be of greater risk to the lender because of the possibility that
the borrower may default once principal payments are required. We attempt to
mitigate the risk of interest-only loans by using prudent underwriting criteria.
The interest-only loans we purchase have an average credit score of
approximately 734 and an average loan-to-value ratio of less than 80% at the
time of purchase.
We
also
purchase one- to four-family mortgage loans under contractual agreement through
correspondent lenders located within our Kansas City and Wichita market areas
and market areas within our geographic region. We purchase approved loans and
the servicing rights, on a loan by loan basis. The loan product is originated
for us to our specifications including interest rates, product description
and
underwriting standards. The loan products include fixed-rate and ARM loans.
We
set prices for loan products at least once each week. The underwriting generally
is performed by a third party underwriter who is under contract with us to
use
our internal underwriting standards, which generally are in accordance with
FNMA’s and FHLMC’s underwriting guidelines. During the 2006 and 2005 fiscal
years, we purchased $80.6 million and $56.6 million of one- to four-family
ARM
loans and $70.6 million and $53.5 million of one- to four-family fixed-rate
mortgage loans, respectively, from correspondent lenders.
The
ability of financial institutions, including us, to originate or purchase large
dollar volumes of real estate loans may be substantially reduced or restricted
under certain economic conditions, with a resultant decrease in interest income
from these assets. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Quantitative and Qualitative Disclosure
about Market Risk” in the Annual Report to Stockholders attached as Exhibit 13
to this Annual Report on Form 10-K.
In
September 2006, the Bank exchanged $404.8 million of mortgage loans with FHLMC
for mortgage-related securities (“loan swap”). As required under Statement of
Financial Accounting Standards (“SFAS”) No. 140 and Emerging Issues Task Force
No. 88-11, management allocated the basis of the established mortgage servicing
rights, excess servicing rights, and the fair value of the securities to
establish the basis of each in the new securities. The
original
basis of the securities received were adjusted for the general valuation
allowance and net deferred fees/costs associated with the swapped loans. The
Bank will earn 25 basis points on the servicing of the loans swapped. The fair
value of the securities received was $395.8 million. Management classified
the
securities as trading securities and subsequent to September 30, 2006, sold
the
securities at approximately book value.
The
following table shows our loan originations, loan purchases, loan sales and
repayment activity for the periods indicated.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Originations
by type:
|
|
|
|
|
|
|
|
Adjustable-rate:
|
|
|
|
|
|
|
|
Real
estate - one- to four-family
|
|
$
|
147,959
|
|
$
|
194,802
|
|
$
|
248,024
|
|
-
multi-family
|
|
|
--
|
|
|
--
|
|
|
--
|
|
-
commercial
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Non-real
estate - consumer
|
|
|
101,956
|
|
|
119,527
|
|
|
131,639
|
|
-
commercial business
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
adjustable-rate loans originated
|
|
|
249,915
|
|
|
314,329
|
|
|
379,663
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
Real
estate - one- to four-family
|
|
|
497,458
|
|
|
514,023
|
|
|
490,963
|
|
-
multi-family
|
|
|
9,688
|
|
|
4,418
|
|
|
4,233
|
|
-
commercial
|
|
|
3,107
|
|
|
4,950
|
|
|
1,200
|
|
Non-real
estate - consumer
|
|
|
51,078
|
|
|
29,802
|
|
|
17,761
|
|
-
commercial business
|
|
|
--
|
|
|
--
|
|
|
12
|
|
Total
fixed-rate originated
|
|
|
561,331
|
|
|
553,193
|
|
|
514,169
|
|
Total
loans originated
|
|
|
811,246
|
|
|
867,522
|
|
|
893,832
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases:
|
|
|
|
|
|
|
|
|
|
|
Real
estate - one- to four-family
|
|
|
329,319
|
|
|
857,207
|
|
|
537,065
|
|
-
multi-family
|
|
|
--
|
|
|
--
|
|
|
--
|
|
-
commercial
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Non-real
estate - consumer
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
loans purchased
|
|
|
329,319
|
|
|
857,207
|
|
|
537,065
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
Swaps and Repayments:
|
|
|
|
|
|
|
|
|
|
|
Real
estate - one- to four-family
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
loans sold
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Principal
balance of loans related to loan swap transaction
|
|
|
404,819
|
|
|
--
|
|
|
--
|
|
Total
sales and swaps
|
|
|
404,819
|
|
|
--
|
|
|
--
|
|
Principal
repayments
|
|
|
973,054
|
|
|
1,026,175
|
|
|
992,425
|
|
Total
reductions
|
|
|
1,377,873
|
|
|
1,026,175
|
|
|
992,425
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in other items, net
|
|
|
394
|
|
|
1,391
|
|
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase
|
|
$
|
(236,914
|
)
|
$
|
699,945
|
|
$
|
439,261
|
|
Asset
Quality
When
a
borrower fails to make a loan payment 15 days after the due date, a late charge
is assessed and a late charge notice is mailed. All delinquent accounts are
reviewed by collection personnel, who attempt to cure the delinquency by
contacting the borrower. If the loan becomes 60 days delinquent, the collection
personnel generally will 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 personnel generally will 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 a written repayment plan from the
borrower which would bring the account current within the next 90 days may
be
approved by a designated Bank officer. 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 Bank officer
as designated by our board of directors, will turn over the account to our
legal
counsel with instructions to initiate foreclosure.
At
September 30, 2006, the asset quality of our portfolio of loans purchased from
nationwide lenders is of essentially the same asset quality as loans originated
locally.
Delinquent
Loans.
The
following tables set forth our loans 30 - 89 delinquent days by type, number
and
amount as of the periods presented.
|
|
Loans
Delinquent for 30-89 Days
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
|
(Dollars
in thousands)
|
|
Real
Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
256
|
|
$
|
19,612
|
|
|
267
|
|
$
|
25,111
|
|
|
310
|
|
$
|
22,252
|
|
Multi-family
|
|
|
1
|
|
|
222
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Consumer
|
|
|
34
|
|
|
644
|
|
|
35
|
|
|
407
|
|
|
49
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
291
|
|
$
|
20,478
|
|
|
302
|
|
$
|
25,518
|
|
|
359
|
|
$
|
22,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
30-89 days delinquent to total loans
|
|
|
|
|
|
0.39
|
%
|
|
|
|
|
0.47
|
%
|
|
|
|
|
0.48
|
%
|
Non-performing
Assets.
The
table below sets forth the amounts and categories of non-performing assets.
Loans are placed on non-accrual status when the loan is greater than 90 days
delinquent. 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 prevailing market rates, and no accruing
loans more than 90 days delinquent. Real estate owned includes assets acquired
in settlement of loans. The balance of one- to four-family real
estate owned is represented by 35 properties totaling $2.4 million, or an
average balance of less than $69 thousand per property.
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accruing
loans:
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
5,391
|
|
$
|
5,034
|
|
$
|
5,761
|
|
$
|
8,686
|
|
$
|
7,701
|
|
Consumer
|
|
|
218
|
|
|
124
|
|
|
310
|
|
|
258
|
|
|
273
|
|
Total
non-accruing loans
|
|
|
5,609
|
|
|
5,158
|
|
|
6,071
|
|
|
8,944
|
|
|
7,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
2,401
|
|
|
1,613
|
|
|
3,976
|
|
|
3,773
|
|
|
2,886
|
|
Construction
and development(1)
|
|
|
--
|
|
|
--
|
|
|
273
|
|
|
273
|
|
|
--
|
|
Consumer
|
|
|
8
|
|
|
40
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
real estate owned
|
|
|
2,409
|
|
|
1,653
|
|
|
4,249
|
|
|
4,046
|
|
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets
|
|
$
|
8,018
|
|
$
|
6,811
|
|
$
|
10,320
|
|
$
|
12,990
|
|
$
|
10,860
|
|
Non-performing
assets as a percentage of total assets
|
|
|
0.10
|
%
|
|
0.08
|
%
|
|
0.12
|
%
|
|
0.15
|
%
|
|
0.12
|
%
|
Non-performing
loans as a percentage of total loans
|
|
|
0.11
|
%
|
|
0.09
|
%
|
|
0.13
|
%
|
|
0.21
|
%
|
|
0.16
|
%
|
At
September 30, 2006, we had $5.6 million in non-accruing loans (these loans
also
may be referred to as “non-performing”), which constituted 0.11% of our total
loan portfolio. At that date, there were no non-accruing loans to any one
borrower or group of related borrowers that exceeded $1.0 million, either
individually or in the aggregate. For the year ended September 30, 2006, gross
interest income which would have been recorded had the non-accruing loans been
current in accordance with their original terms amounted to $105 thousand.
The
amount that was included in interest income on these loans, before non-accruing
status, was $82 thousand for the year ended September 30, 2006.
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
“special mention”, “substandard”, “doubtful” or “loss”. Assets classified as
“special mention” are performing loans on which known information about the
collateral pledged or the possible credit problems of the borrowers have caused
management to have doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such assets in the non-performing asset categories. 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 as those classified “substandard,” with the added characteristic that
the weaknesses present make “collection or liquidation in full,” on the basis of
currently existing facts, conditions and values “highly questionable and
improbable.” Assets classified as “loss” are those considered “uncollectible”
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When
an
insured institution classifies problem assets as either special mention,
substandard or doubtful, it may establish allowances for loan losses in an
amount deemed prudent by management and approved by the board of directors.
General allowances may be established to recognize the inherent risk associated
with lending activities, but unlike specific allowances, have not been allocated
to specific problem assets within a portfolio of similar assets. When an insured
institution classifies problem assets as “loss,” it is required either to
establish a specific 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 loss allowances.
In
connection with the filing of the Bank’s periodic reports with the OTS and in
accordance with our asset classification policy, we regularly review the problem
assets in our portfolio to determine whether any assets require classification
in accordance with applicable regulations. The following table sets forth the
carrying amounts of our assets, exclusive of general valuation and specific
allowances, classified as special mention, substandard or doubtful at September
30, 2006.
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family real estate
|
20
|
|
$
1,238
|
|
102
|
|
$
6,689
|
|
--
|
|
$
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned
|
--
|
|
--
|
|
36
|
|
2,409
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
classified assets
|
20
|
|
$
1,238
|
|
138
|
|
$
9,098
|
|
--
|
|
$
--
|
Provision
for Loan Losses.
We
recorded a provision for loan losses in fiscal years 2006, 2005 and 2004 of
$247
thousand, $215 thousand and $64 thousand, respectively. 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 year 2006
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, 2006.
Allowance
for Loan Losses.
At
September 30, 2006, our allowance for loan losses was $4.4 million or 0.08%
of
the total loan portfolio and approximately 79% of total non-accruing loans.
This
compares with an allowance for loan losses of $4.6 million or 0.08% of the
total
loan portfolio and approximately 89% of total non-accruing loans as of September
30, 2005. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies” in the Annual Report to
Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K for
a
full discussion of the allowance for loan losses.
Historical
net charge-offs are not necessarily indicative of the amount of net charge-offs
that the Bank will realize in the future resulting from an increase in the
one-
to four-family mortgage loan portfolio. The following table provides a recap
of
our allowance for loan loss activity for the periods presented.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
4,598
|
|
$
|
4,495
|
|
$
|
4,550
|
|
$
|
4,825
|
|
$
|
4,837
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
95
|
|
|
91
|
|
|
84
|
|
|
153
|
|
|
114
|
|
Consumer
|
|
|
37
|
|
|
56
|
|
|
77
|
|
|
144
|
|
|
85
|
|
Total
charge-offs
|
|
|
132
|
|
|
147
|
|
|
161
|
|
|
297
|
|
|
199
|
|
Recoveries
|
|
|
1
|
|
|
35
|
|
|
42
|
|
|
22
|
|
|
3
|
|
Net
charge-offs
|
|
|
131
|
|
|
112
|
|
|
119
|
|
|
275
|
|
|
196
|
|
Allowance
on loans in the loan swap transaction
|
|
|
(281
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Provisions
charged to operations
|
|
|
247
|
|
|
215
|
|
|
64
|
|
|
--
|
|
|
184
|
|
Balance
at end of period
|
|
$
|
4,433
|
|
$
|
4,598
|
|
$
|
4,495
|
|
$
|
4,550
|
|
$
|
4,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs during the period to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
outstanding during the period (1)
|
|
|
--
|
%
|
|
--
|
%
|
|
--
|
%
|
|
--
|
%
|
|
--
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs during the period to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-performing
assets
|
|
|
1.77
|
%
|
|
1.31
|
%
|
|
1.02
|
%
|
|
2.31
|
%
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
as a percentage of non-accruing loans
|
|
|
79.03
|
%
|
|
89.14
|
%
|
|
74.04
|
%
|
|
50.87
|
%
|
|
60.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
as a percentage of total loans (end of period)
|
|
|
0.08
|
%
|
|
0.08
|
%
|
|
0.09
|
%
|
|
0.11
|
%
|
|
0.10
|
%
|
(1)
Ratios
calculate to be less than 0.01%.
The
distribution
of our allowance for loan losses at the dates indicated is summarized as
follows:
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
|
of
Loans
|
|
|
|
of
Loans
|
|
|
|
of
Loans
|
|
|
|
of
Loans
|
|
|
|
of
Loans
|
|
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
Amount
of
|
|
Category
|
|
Amount
of
|
|
Category
|
|
Amount
of
|
|
Category
|
|
Amount
of
|
|
Category
|
|
Amount
of
|
|
Category
|
|
|
|
Loan
Loss
|
|
to
Total
|
|
Loan
Loss
|
|
to
Total
|
|
Loan
Loss
|
|
to
Total
|
|
Loan
Loss
|
|
to
Total
|
|
Loan
Loss
|
|
to
Total
|
|
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
3,796
|
|
|
94.18
|
%
|
$
|
3,866
|
|
|
94.78
|
%
|
$
|
3,561
|
|
|
94.19
|
%
|
$
|
3,468
|
|
|
93.99
|
%
|
$
|
3,792
|
|
|
94.13
|
%
|
Multi-family
|
|
|
46
|
|
|
0.92
|
|
|
203
|
|
|
0.74
|
|
|
177
|
|
|
0.74
|
|
|
272
|
|
|
0.89
|
|
|
322
|
|
|
0.91
|
|
Commercial
real estate
|
|
|
8
|
|
|
0.16
|
|
|
67
|
|
|
0.16
|
|
|
65
|
|
|
0.18
|
|
|
59
|
|
|
0.18
|
|
|
38
|
|
|
0.11
|
|
Construction
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development(1)
|
|
|
258
|
|
|
0.46
|
|
|
129
|
|
|
0.47
|
|
|
197
|
|
|
0.60
|
|
|
143
|
|
|
0.52
|
|
|
177
|
|
|
0.53
|
|
Consumer
|
|
|
321
|
|
|
4.28
|
|
|
333
|
|
|
3.85
|
|
|
488
|
|
|
4.29
|
|
|
412
|
|
|
4.42
|
|
|
467
|
|
|
4.32
|
|
Commercial
business
|
|
|
4
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
7
|
|
|
--
|
|
|
11
|
|
|
--
|
|
|
8
|
|
|
--
|
|
Unallocated
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
185
|
|
|
--
|
|
|
21
|
|
|
--
|
|
Total
|
|
$
|
4,433
|
|
|
100.00
|
%
|
$
|
4,598
|
|
|
100.00
|
%
|
$
|
4,495
|
|
|
100.00
|
%
|
$
|
4,550
|
|
|
100.00
|
%
|
$
|
4,825
|
|
|
100.00
|
%
|
(1)
At
September 30, 2006 there were no development loans in the loan
portfolio.
Investment
Activities
Federally
chartered savings institutions have the authority to invest in various types
of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies, government-sponsored enterprises, including callable agency
securities, municipal bonds, certain certificates of deposit of insured banks
and savings institutions, certain bankers’ acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions also may 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 Bank” and “Qualified
Thrift Lender Test” for a discussion of additional restrictions on our
investment activities.
The
Chief
Financial Officer has the primary responsibility for the management of the
Bank’s investment portfolio, subject to the direction and guidance of the ALCO.
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 net deposit flows, the volume
of loan sales and the anticipated demand for funds via withdrawals, repayments
of borrowings, 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 liquidity
risk, interest rate risk, reinvestment risk and credit risk. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Cash flow projections
are reviewed regularly and updated to assure that adequate liquidity is
maintained. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report
to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
We
classify securities as trading, available-for-sale or held-to-maturity at the
date of purchase. Securities that are purchased and held principally for resale
in the near future are classified as trading securities and are reported at
fair
value, with unrealized gains and losses included in Gain on trading securities,
net in the consolidated statements of income. Available-for-sale securities
are
reported at fair market value, with unrealized gains and losses reported as
a
component of accumulated other comprehensive income (loss) within stockholders’
equity, net of deferred income taxes. Management regularly reviews the
available-for-sale portfolio for other-than-temporary impairment and records
any
such impairment in the consolidated statements of income. Held-to-maturity
securities are reported at cost, adjusted for amortization of premium and
accretion of discount. We have both the ability and intent to hold the
held-to-maturity securities to maturity.
Investment
Securities.
Our
investment securities portfolio consists of U.S. Government and agency notes,
including those issued by government-sponsored enterprises such as FNMA and
FHLMC, and municipal bonds. At September 30, 2006, our investment securities
portfolio totaled $429.5 million. The portfolio consists of securities
classified as held-to-maturity and available-for-sale. See “Note 2 of the Notes
to Consolidated Financial Statements” in the Annual Report to Stockholders
attached as Exhibit 13 to this Annual Report on Form 10-K.
Mortgage-Related
Securities.
Our
mortgage-related securities portfolio consists primarily of securities issued
by
government-sponsored enterprises. At September 30, 2006, our mortgage-related
securities portfolio totaled $2.08 billion. A portion of the mortgage-related
securities 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 possessing different risk characteristics. At September
30,
2006, we held CMOs totaling $10.9 million, none of which qualified as high
risk
mortgage securities as defined under OTS regulations. Our CMOs are currently
classified as both held-to- maturity and available-for-sale. We do not purchase
residual interest bonds.
During
fiscal year 2006, our mortgage-related securities portfolio decreased $60.5
million from $2.15 billion at September 30, 2005 to $2.08 billion at September
30, 2006. Maturities and repayments totaled $564.4 million during fiscal year
2006 which were partially offset by $395.8 million of securities received in
the
loan swap transaction and $111.1 million of securities purchased. The securities
received in the loan swap transaction were classified as trading and were sold
subsequent to September 30, 2006 at approximately book value.
Of
the
$111.1 million of mortgage-related securities purchased, $11.1 million were
fixed-rate with a weighted average life of 2.20 years and a weighted average
yield of 6.42% and $100.0 million were adjustable-rate with a weighted average
yield of 5.97% and an average of 2.08 years until their first repricing
opportunity. See “Note 3 of the Notes to Consolidated Financial Statements” in
the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report
on Form 10-K.
Mortgage-related
securities generally yield less than the loans that underlie such securities
because of the servicing fee retained by the servicer and the cost of payment
guarantees or credit enhancements that reduce credit risk. However,
mortgage-related securities are generally more liquid than individual mortgage
loans and may be used to collateralize certain borrowings and public unit
depositors of the Bank. In general, mortgage-related securities issued or
guaranteed by FNMA or FHLMC are weighted at no more than 20% for risk-based
capital purposes compared to the 50% risk-weighting assigned to most
non-securitized mortgage loans.
When
securities are purchased for a price other than par, the difference between
the
price paid and par is accreted to or amortized against the interest earned
over
the life of the security, depending on whether a discount or premium to par
is
paid. Movements in interest rates affect prepayment rates which, in turn, affect
the average lives of mortgage-related securities and the speed at which the
discount or premium is accreted to or amortized against earnings.
While
mortgage-related securities, such as CMOs and Real Estate Mortgage Investment
Conduits (“REMICs”), carry a reduced credit risk compared to whole loans, these
securities remain subject to the risk that a fluctuating interest rate
environment, along with other factors such as the geographic distribution of
the
underlying mortgage loans, may alter the prepayment rate of the underlying
mortgage loans and so affect both the prepayment speed, and value, of the
securities. As noted above, the Bank, on some transactions, pays a premium
over
par value for mortgage-related securities purchased. These premiums may be
significant and may cause significant negative yield adjustments due to
accelerated prepayments on the underlying mortgages.
The
following table sets forth the composition of our investment and
mortgage-related securities portfolio, excluding FHLB stock, at the dates
indicated. Our investment securities portfolio at September 30, 2006 did not
contain securities of any issuer with an aggregate book value in excess of
10%
of our stockholders’ equity, excluding those issued by the government or its
agencies. The carrying value of our investment in FHLB stock approximates its
fair value. At September 30, 2006, 2005 and 2004, the carrying value of FHLB
stock was $165.1 million, $182.3 million and $174.1 million, respectively,
which
was in excess of 10% of our stockholders’ equity.
|
September
30,
|
|
2006
|
|
2005
|
|
2004
|
|
Carrying
Value
|
|
%
of
Total
|
|
Fair
Value
|
|
Carrying
Value
|
|
%
of
Total
|
|
Fair
Value
|
|
Carrying
Value
|
|
%
of
Total
|
|
Fair
Value
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
|
$ 396,904
|
|
100.00
|
%
|
$ 396,904
|
|
$ --
|
|
--
|
%
|
$ --
|
|
$ --
|
|
--
|
%
|
$ --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
securities
|
$ 556,248
|
|
74.59
|
%
|
$ 556,248
|
|
$ 737,638
|
|
100.00
|
%
|
$ 737,638
|
|
$ 1,201,800
|
|
100.00
|
%
|
$ 1,201,800
|
U.S.
government and agency securities
|
188,264
|
|
25.25
|
|
188,264
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Municipal
investments
|
1,216
|
|
0.16
|
|
1,216
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
securities available-for-sale
|
$ 745,728
|
|
100.00
|
%
|
$ 745,728
|
|
$ 737,638
|
|
100.00
|
%
|
$ 737,638
|
|
$ 1,201,800
|
|
100.00
|
%
|
$ 1,201,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
securities
|
$ 1,131,634
|
|
82.50
|
%
|
$ 1,101,159
|
|
$ 1,407,616
|
|
76.58
|
%
|
$ 1,383,268
|
|
$ 1,446,908
|
|
69.40
|
%
|
$ 1,443,168
|
U.S.
government and agency securities
|
240,000
|
|
17.50
|
|
233,525
|
|
430,499
|
|
23.42
|
|
424,952
|
|
638,079
|
|
30.60
|
|
645,601
|
Total
securities held-to-maturity
|
$ 1,371,634
|
|
100.00
|
%
|
$ 1,334,684
|
|
$ 1,838,115
|
|
100.00
|
%
|
$ 1,808,220
|
|
$ 2,084,987
|
|
100.00
|
%
|
$ 2,088,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
$ 2,514,266
|
|
|
|
$ 2,477,316
|
|
$ 2,575,753
|
|
|
|
$ 2,545,858
|
|
$ 3,286,787
|
|
|
|
$ 3,290,569
|
The
composition and maturities of the investment and mortgage-related securities
portfolio, excluding FHLB stock, are indicated in the following table. The
trading securities were all sold subsequent to September 30, 2006 for
approximately book value. Yields on tax-exempt investments are not calculated
on
a taxable equivalent basis.
|
September
30, 2006
|
|
Less
than 1 year
|
|
1
to 5 years
|
|
5
to 10 years
|
|
Over
10 years
|
|
Total
Securities
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Carrying
|
Average
|
|
Carrying
|
Average
|
|
Carrying
|
Average
|
|
Carrying
|
Average
|
|
Carrying
|
Average
|
|
Fair
|
|
Value
|
Yield
|
|
Value
|
Yield
|
|
Value
|
Yield
|
|
Value
|
Yield
|
|
Value
|
Yield
|
|
Value
|
|
(Dollars
in thousands)
|
Trading
securities
|
$ --
|
--
|
%
|
$ --
|
--
|
%
|
$ 8,077
|
4.50
|
%
|
$ 388,827
|
5.28
|
%
|
$ 396,904
|
5.26
|
%
|
$ 396,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
securities
|
$ 5
|
8.00
|
%
|
$ 14,281
|
6.37
|
%
|
$ 11,251
|
6.00
|
%
|
$ 530,711
|
5.20
|
%
|
$ 556,248
|
5.25
|
%
|
$ 556,248
|
U.S.
government and agency securities
|
45,213
|
5.22
|
|
143,051
|
4.99
|
|
--
|
--
|
|
--
|
--
|
|
188,264
|
5.05
|
|
188,264
|
Municipal
investments
|
--
|
--
|
|
--
|
--
|
|
--
|
--
|
|
1,216
|
5.25
|
|
1,216
|
5.25
|
|
1,216
|
Total
securities available-for-sale
|
$ 45,218
|
5.22
|
%
|
$ 157,332
|
5.12
|
%
|
$ 11,251
|
6.00
|
%
|
$ 531,927
|
5.20
|
%
|
$ 745,728
|
5.20
|
%
|
$ 745,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
securities
|
$ --
|
--
|
%
|
$ 56,938
|
3.50
|
%
|
$ --
|
--
|
%
|
$ 1,074,696
|
4.29
|
%
|
$ 1,131,634
|
4.25
|
%
|
$ 1,101,159
|
U.S.
government and agency securities
|
--
|
--
|
|
190,000
|
3.23
|
|
--
|
--
|
|
50,000
|
5.83
|
|
240,000
|
3.77
|
|
233,525
|
Total
securities held-to-maturity
|
$ --
|
--
|
%
|
$ 246,938
|
3.29
|
%
|
$ --
|
--
|
%
|
$ 1,124,696
|
4.36
|
%
|
$ 1,371,634
|
4.17
|
%
|
$ 1,334,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
$ 45,218
|
5.22
|
%
|
$ 404,270
|
4.00
|
%
|
$ 19,328
|
5.37
|
%
|
$ 2,045,450
|
4.75
|
%
|
$ 2,514,266
|
4.64
|
%
|
$ 2,477,316
|
Sources
of Funds
General.
Our
sources of funds are deposits, borrowings, repayment of principal and interest
on loans and mortgage-related securities, interest earned on or maturities
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
accounts, interest-bearing and non-interest bearing checking accounts and
certificates of deposit. We rely primarily upon competitive pricing policies,
marketing and customer service to attract and retain deposits. The flow of
deposits is influenced significantly by general economic conditions, changes
in
money market and prevailing interest rates and competition.
The
variety of deposit accounts we offer has allowed us to utilize strategic pricing
to obtain funds and to respond with flexibility to changes in consumer demand.
We endeavor to manage the pricing of our deposits in keeping with our asset
and
liability management, liquidity and profitability objectives. Based on our
experience, we believe that our deposits are stable sources of funds. Despite
this stability, our ability to attract and maintain these deposits and the
rates
paid on them has been, and will continue to be, significantly affected by market
conditions.
The
following table sets forth our deposit flows during the periods indicated.
Included in the table are brokered and public unit deposits which totaled $233.5
million, $213.6 million and $194.6 million at September 30, 2006, 2005 and
2004,
respectively. The growth in wholesale deposits from September 30, 2004 to
September 30, 2006 partially offset the decrease in retail deposits for each
year presented. During the years presented, the Bank experienced aggressive
pricing by other financial institutions in the Bank’s local markets. The
decrease in retail deposits is primarily a result of the Bank not matching
top
competitors’ rates because of the likely adverse impact on
earnings.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Opening
balance
|
|
$
|
3,960,297
|
|
$
|
4,127,774
|
|
$
|
4,238,145
|
|
Deposits
|
|
|
7,422,474
|
|
|
6,935,934
|
|
|
6,507,746
|
|
Withdrawals
|
|
|
7,594,727
|
|
|
7,190,694
|
|
|
6,700,409
|
|
Interest
credited
|
|
|
112,387
|
|
|
87,283
|
|
|
82,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
3,900,431
|
|
$
|
3,960,297
|
|
$
|
4,127,774
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease
|
|
$
|
(59,866
|
)
|
$
|
(167,477
|
)
|
$
|
(110,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Percent
decrease
|
|
|
(1.51
|
)%
|
|
(4.06
|
)%
|
|
(2.60
|
)%
|
The
following table sets forth the dollar amount of deposits in the various types
of
deposit programs we offered for the periods indicated.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Amount
|
|
of
Total
|
|
Amount
|
|
of
Total
|
|
Amount
|
|
of
Total
|
|
|
|
(Dollars
in thousands)
|
|
Transactions
and Savings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
|
|
$
|
402,898
|
|
|
10.33
|
%
|
$
|
398,490
|
|
|
10.06
|
%
|
$
|
380,765
|
|
|
9.22
|
%
|
Passbook
and Passcard
|
|
|
106,347
|
|
|
2.73
|
|
|
121,133
|
|
|
3.06
|
|
|
125,992
|
|
|
3.05
|
|
Money
market
|
|
|
808,910
|
|
|
20.74
|
|
|
873,570
|
|
|
22.06
|
|
|
929,862
|
|
|
22.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-certificates
|
|
|
1,318,155
|
|
|
33.80
|
|
|
1,393,193
|
|
|
35.18
|
|
|
1,436,619
|
|
|
34.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
(by rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
- 0.99%
|
|
|
125
|
|
|
--
|
|
|
123
|
|
|
--
|
|
|
5,109
|
|
|
0.12
|
|
1.00
- 1.99%
|
|
|
--
|
|
|
--
|
|
|
137,442
|
|
|
3.47
|
|
|
636,282
|
|
|
15.41
|
|
2.00
- 2.99%
|
|
|
215,891
|
|
|
5.53
|
|
|
863,948
|
|
|
21.82
|
|
|
1,236,086
|
|
|
29.95
|
|
3.00
- 3.99%
|
|
|
541,236
|
|
|
13.88
|
|
|
905,058
|
|
|
22.85
|
|
|
449,464
|
|
|
10.89
|
|
4.00
- 4.99%
|
|
|
1,323,434
|
|
|
33.93
|
|
|
600,367
|
|
|
15.16
|
|
|
228,475
|
|
|
5.54
|
|
5.00
- 5.99%
|
|
|
497,453
|
|
|
12.75
|
|
|
2,611
|
|
|
0.07
|
|
|
22,221
|
|
|
0.54
|
|
6.00
- 6.99%
|
|
|
4,137
|
|
|
0.11
|
|
|
57,555
|
|
|
1.45
|
|
|
113,518
|
|
|
2.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
certificates
|
|
|
2,582,276
|
|
|
66.20
|
|
|
2,567,104
|
|
|
64.82
|
|
|
2,691,155
|
|
|
65.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$
|
3,900,431
|
|
|
100.00
|
%
|
$
|
3,960,297
|
|
|
100.00
|
%
|
$
|
4,127,774
|
|
|
100.00
|
%
|
The
following table sets forth the rate and maturity information for our certificate
of deposit portfolio as of September 30, 2006.
|
|
Amount
|
|
Rate
|
|
Certificates
maturing:
|
|
(Dollars
in thousands)
|
|
Within
three months
|
|
$
|
518,974
|
|
|
4.40
|
%
|
Over
three to six months
|
|
|
314,279
|
|
|
4.04
|
|
Over
six months to one year
|
|
|
825,885
|
|
|
4.45
|
|
Over
one to two years
|
|
|
695,580
|
|
|
4.38
|
|
Over
two to three years
|
|
|
143,703
|
|
|
4.22
|
|
Over
three to four years
|
|
|
47,735
|
|
|
4.10
|
|
Over
four to five years
|
|
|
34,466
|
|
|
4.47
|
|
Thereafter
|
|
|
1,654
|
|
|
4.37
|
|
|
|
$
|
2,582,276
|
|
|
4.35
|
%
|
The
following table sets forth the maturity periods of our certificates of deposit
in amounts of $100 thousand or more at September 30, 2006.
|
|
Amount
|
|
Rate
|
|
|
|
(Dollars
in thousands)
|
|
Certificates
maturing:
|
|
|
|
|
|
Three
months or less
|
|
$
|
235,949
|
|
|
5.00
|
%
|
Over
three months through six months
|
|
|
67,286
|
|
|
4.43
|
|
Over
six months through twelve months
|
|
|
147,097
|
|
|
4.60
|
|
Over
twelve months
|
|
|
164,017
|
|
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
$
|
614,349
|
|
|
4.71
|
%
|
The
board
of directors has authorized the utilization of brokers to obtain deposits as
a
source of funds. The Bank has entered into several relationships with nationally
recognized wholesale deposit brokerage firms to accept deposits from these
firms. Depending on market conditions, the Bank may use brokered deposits from
time to time to fund asset growth and gather deposits that may help to manage
interest rate risk. The Bank’s policies limit the amount of brokered deposits
that it may have at any time to
15% of
total deposits. The rates paid on brokered deposits plus fees are generally
equivalent to rates offered by FHLB on advances and comparable to some rates
paid on retail deposits. At September 30, 2006 and 2005, the balance of brokered
deposits was $4.3 million and $44.3 million, respectively.
The
board
of directors also has authorized the utilization of public unit deposits as
a
source of funds. The Bank’s policies limit the amount of public unit deposits
that it may have at any time to 10% of total deposits. In order to qualify
to
obtain such deposits, the Bank must have a branch in each county in which it
collects public unit deposits. At September 30, 2006 and 2005, the balance
of
public unit deposits was $229.2 million and $169.3 million, respectively.
Borrowings.
Although
deposits are our main source of funds, we may utilize borrowings when, at the
time of the borrowing, they can be invested at a positive rate spread, when
we
desire additional capacity to fund loan demand or when they help us meet our
asset and liability management objectives. Historically, our borrowings
primarily have consisted of advances from FHLB and occasionally securities
sold
under agreement to repurchase. During the year, from time to time, we utilized
our line-of-credit that we maintain at FHLB. At September 30, 2006, we did
not
have any borrowings on our line-of-credit. See “Note 8 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders” attached
as Exhibit 13 to this Annual Report on Form 10-K.
The
Bank
has interest rate swaps with a notional amount of $800.0 million to hedge an
equal amount of FHLB advances. The interest rate swaps are designated as fair
value hedges and the Bank accounts for the hedges using the shortcut method.
Unrealized gains (losses) in the fair value of the interest rate swaps are
offset by an unrealized gain (loss) on the hedged FHLB advances. At September
30, 2006, the net fair value adjustment on the interest rate swaps was an
unrealized loss of $27.3 million. The carrying amount of the FHLB advances
was
reduced by an identical amount.
We
may
obtain advances from FHLB upon the security of our blanket pledge agreement.
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. Such advances may
be
made pursuant to several different credit programs, each of which has its own
interest rate, maturity, repayment, and convertible features, if any. At
September 30, 2006, we had $3.30 billion in FHLB advances outstanding.
In
2004,
the Company formed Capitol Federal Financial Trust I (the “Trust”), which issued
$52.0 million of variable rate cumulative trust preferred securities in a
private transaction exempt from registration under the Securities Act of 1933.
The Trust used the proceeds from the sale of its trust preferred securities
and
from the sale of $1.6 million of its common securities to the Company to
purchase $53.6 million of Junior Subordinated Deferrable Interest Debentures
(the “Debentures”) which are the sole assets of the Trust. See “Note 10 of the
Notes to Consolidated Financial Statements” in the Annual Report to Stockholders
attached as Exhibit 13 to this Annual Report on Form 10-K. Interest on the
Debentures is due quarterly in January, April, July and October until the
maturity date of April 7, 2034. The interest rate on the Debentures, which
is
identical to the distribution rate paid on the trust securities and resets
at
each interest payment, is based upon the three month LIBOR rate plus 275 basis
points. Principal is due at maturity. The Debentures are callable, in part
or
whole, beginning on April 7, 2009, at par, at the option of the Company.
Redemption
of the Debentures by the Company will result in redemption of a like amount
of
trust preferred securities by the Trust. There are certain covenants that the
Company is required to comply with regarding the Debentures. These covenants
include a prohibition on cash dividends in the event of default or deferral
of
interest on the Debentures, annual certifications to the Trust and other
covenants related to the payment of interest and principal and maintenance
of
the Trust. The Company was in compliance with all the covenants at September
30,
2006.
The
following table sets forth certain information relating to each category of
short-term borrowings for which the average balance outstanding during the
period was more than 30% of stockholders’ equity at the end of the period. The
average balance, maximum balance, and weighted average interest rate during
fiscal year 2006 reflect all FHLB advances, including the FHLB line of credit,
that were scheduled to mature within one year at any time during fiscal year
2006.
|
(Dollars
in thousands)
|
Balance
at September 30, 2006
|
$
750,000
|
Maximum
balance during fiscal year 2006
|
1,019,000
|
Average
balance during fiscal year 2006
|
817,332
|
Weighted
average interest rate during fiscal year 2006
|
3.56%
|
Weighted
average interest rate at September 30, 2006
|
3.52%
|
Subsidiary
and Other Activities
As
a
federally chartered savings bank, we are permitted by OTS regulations to invest
up to 2% of our assets, or $164.0 million at September 30, 2006, in the stock
of, or as unsecured loans to, service corporation subsidiaries. We may invest
an
additional 1% of our assets in service corporations where such additional funds
are used for inner-city or community development purposes. At September 30,
2006,
the
Bank had one subsidiary, Capitol Funds, Inc. As of September 30, 2006, our
total
investment in this subsidiary was $3.3 million. Capitol Funds, Inc. has a wholly
owned subsidiary, Capitol Federal Mortgage Reinsurance Company (“CFMRC”). CFMRC
serves as a reinsurance company for the private mortgage insurance companies
the
Bank uses in its normal course of operations. CFMRC assumes the risk of default
on loans exceeding a five percent loss and less than a ten percent loss. During
fiscal 2006, Capitol Funds, Inc. reported consolidated net income of $232
thousand which included net income of $236 thousand from CFMRC.
REGULATION
General
The
Bank,
as a federally chartered savings institution, is subject to federal regulation
and oversight by the OTS extending to all aspects of its operations. The Bank
also is subject to regulation by the FDIC, which insures the deposits of the
Bank to the maximum extent permitted by law, and to requirements established
by
the Federal Reserve Board. Such regulation and supervision primarily is intended
for the protection of depositors and borrowers and not for the purpose of
protecting stockholders. The investment and lending authority of savings
institutions is prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations.
The
OTS
regularly examines the Bank and prepares reports on the Bank’s operations,
including any deficiencies. These reports are presented to the Bank’s board of
directors. The FDIC also has the authority to examine the Bank in its role
as
the administrator of the Deposit Insurance Fund (“DIF”) which is the new fund
established upon the merger of the Savings Association Insurance Fund (“SAIF”)
and the Bank Insurance Fund (“BIF”) in March 2006. The Bank’s relationship with
its depositors and borrowers is also 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 the Bank’s mortgage requirements. Any material
change in such regulations, whether by the FDIC, the OTS, the Federal Reserve
Board, Congress or states in which we do business, could have a material adverse
impact on MHC, the Company and the Bank and their operations.
Capitol
Federal Savings Bank MHC
MHC
is a
federal mutual holding company within the meaning of Section 10(o) of the Home
Owners’ Loan Act. As such, MHC is required to register with and be subject to
examination and supervision of the OTS as well as certain reporting
requirements. In addition, the OTS has enforcement authority over MHC and its
non-savings institution subsidiaries, if any. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be
a
serious risk to the financial safety, soundness or stability of the
Bank.
A
mutual
holding company is permitted to, among other things:
· |
invest
in the stock of a savings
institution;
|
· |
acquire
a mutual institution through the merger of such institution into
a savings
institution subsidiary of such mutual holding
company;
|
· |
merge
with or acquire another mutual holding company of a savings
institution;
|
· |
acquire
non-controlling amounts of the stock of savings institutions and
savings
institution holding companies, subject to certain
restrictions;
|
· |
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
a subsidiary savings institution has its home
office;
|
· |
furnish
or perform management services for a savings institution subsidiary
of
such company;
|
· |
hold,
manage or liquidate assets owned or acquired from a savings institution
subsidiary of such company;
|
· |
hold
or manage properties used or occupied by a savings institution subsidiary
of such company; and
|
· |
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 the
activities of financial holding companies under the Bank Holding Company Act
of
1956, as amended, subject to prior approval by the OTS.
Capitol
Federal Financial
The
purpose and powers of the Company are to pursue any or all of the lawful
objectives of a federal mutual holding company and to exercise any of the powers
accorded to a mutual holding company.
If
the
Bank fails the qualified thrift lender test, within one year of such failure
MHC
and the Company 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
savings and loan holding company. If the Bank fails the test a second time,
MHC
and the Company must immediately register as, and become subject to,
the
restrictions
applicable to a bank holding company. See “Qualified Thrift Lender
Test.”
MHC
and
the Company must obtain approval from the OTS before acquiring control of any
other savings institution. Interstate acquisitions are permitted based on
specific state authorization or in a supervisory acquisition of a failing
savings institution.
Capitol
Federal Savings Bank
The
OTS
has extensive authority over the operations of savings institutions. As part
of
this authority, the Bank is required to file periodic reports with the OTS
and
is subject to periodic examinations by the OTS and also may be examined by
the
FDIC. The last regular OTS examination of the Bank was as of
December 31, 2005. All savings institutions are subject to a semi-annual
assessment, based upon the savings institution’s total assets, to fund the
operations of the OTS. The Bank’s OTS assessment for the fiscal year ended
September 30, 2006 was $1.3 million.
The
OTS
also has extensive enforcement authority over all savings institutions and
their
holding companies, including the Bank, the Company and 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 OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In
addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and the Bank 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 OTS. Federal savings institutions also generally are authorized
to branch nationwide. The Bank is in compliance with the noted
restrictions.
The
Bank’s general permissible lending limit for loans-to-one-borrower is equal to
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, 2006, the Bank’s lending limit
under this restriction was $116.9 million. The Bank is in compliance with the
loans-to-one-borrower limitation.
The
OTS,
as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as information
systems, loan underwriting and documentation, asset growth and quality,
earnings, internal controls and audit systems, interest rate risk exposure,
and
excessive compensation and benefits. Any institution that fails to comply with
these standards must submit a compliance plan.
Insurance
of Accounts and Regulation by the FDIC
The
Bank
is a member of the DIF, 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 DIF. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after
giving the OTS 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
merged the BIF
and
the SAIF to form the DIF on March 31, 2006 in accordance with the Federal
Deposit Insurance Reform Act of 2005. FDIC maintains the DIF by assessing
depository institutions an insurance premium. The FDIC Board approved a new
risk-based premium system in November 2006, effective January 1, 2007. The
FDIC’s new regulations for risk-based deposit insurance assessments establish
four Risk Categories. Risk Category I, for well-capitalized institutions that
are financially sound with only a few minor weaknesses, includes approximately
95% of FDIC-insured institutions. Risk Categories II, III, and IV present
progressively greater risks to the deposit insurance fund. Effective January
1,
2007, Risk Category I institutions pay quarterly assessments for deposit
insurance at annual rates of five to seven basis points. The rates for Risk
Categories II, III, and IV are seven, 28, and 43 basis points, respectively.
Rates are subject to change with advance notice to insured
institutions.
Within
Risk Category I, the precise rate for an individual institution with less than
$10 billion in assets is generally determined by a formula using CAMELS ratings
which are assigned in examinations, and financial ratios. A
different
method
applies for larger institutions. The rate for an individual institution is
applied to its assessment base, which is generally its deposit liabilities
subject to certain adjustments. An institution insured by the FDIC on December
31, 1996 which had previously paid assessments (or its successor) is eligible
for certain credit against deposit insurance assessments.
As a
result of the Bank’s credit, it anticipates no premium expense during calendar
year 2007.
The
Bank,
like other former SAIF insured institutions and BIF insured institutions, is
required to pay a Financing Corporation (“FICO”) assessment in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s. For
the
first quarter of fiscal year 2007,
the
annual rate for this assessment is 1.24 basis points for each $100 in domestic
deposits. These assessments, which may be revised based upon the level of BIF
and former SAIF classified insured institution’s deposits, will continue until
the bonds mature in 2017 through 2019.
Regulatory
Capital Requirements
Federally
insured savings institutions, such as the Bank, are required to maintain a
minimum level of regulatory capital. The OTS 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 OTS is also authorized
to impose capital requirements in excess of these standards on individual
institutions on a case-by-case basis.
As
a
result of the prompt corrective action regulations, to be adequately
capitalized, a savings institution must have a ratio of core capital to total
assets of at least 4% (unless its supervisory condition permits 3%),
a
ratio of core capital to risk-weighted assets of at least 4% and a ratio of
total capital to risk-weighted assets of at least 8%. To be well capitalized,
these ratios must be at least 5%, 6% and 10%, respectively. On September 30,
2006, the Bank had core capital of $783.6 million, total risk-based capital
of
$781.4 million and risk-weighted assets of $3.47 billion. It had a core capital
ratio of 9.5%, a core capital to risk-weighted assets ratio of 22.6% and a
total
risk weighted capital ratio of 22.5%.
Core
capital generally consists of common stockholders’ equity and retained earnings,
and noncumulative perpetual preferred stock and related surplus, adjusted for
such items as certain intangible assets, disallowed servicing assets and
accumulated gains/losses on available-for-sale securities. At September 30,
2006, the Bank had $433 thousand of technology based intangible assets and
$692
thousand of disallowed servicing assets which were deducted from core capital
and $1.5 million of accumulated losses on available-for-sale securities, net
of
taxes, which were added to core capital.
Total
risk-based capital consists of core capital, as defined above, plus
supplementary capital, less certain assets including equity investments.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan
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 OTS 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, 2006,
the Bank had $4.4 million of general valuation loan loss allowances, which
was
less than 1.25% of risk-weighted assets. At September 30, 2006, the Bank had
$6.6 million of equity investments deducted from total capital.
In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, are multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS
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 approved insurer.
Under
the
prompt corrective action regulations, the OTS 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 OTS generally
is
required to take action to restrict the activities of any institution that
is
less than adequately capitalized. Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS 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 OTS may also
impose additional restrictions to significantly undercapitalized
institutions.
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 core
capital or core capital to risk-weighted assets ratios of less than 3% or a
total capital to risk-weighted assets ratio of less than 6% 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
equity to total assets ratio of 2% or less is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized institutions. In addition, the OTS 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.
The
OTS
generally is authorized to reclassify an institution into a lower capital
category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The
imposition by the OTS or the FDIC of any of these measures on the Bank may
have
a substantial adverse effect on its operations and profitability.
Limitations
on Dividends and Other Capital Distributions
OTS
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
under
OTS regulations, savings institutions, such as the Bank, may make capital
distributions during any calendar year equal to earnings of the previous two
calendar years and current year-to-date earnings. It is generally required
under
OTS regulations that the Bank remain well-capitalized before and after the
proposed distribution. However, an institution deemed to be in need of more
than
normal supervision by the OTS may have its dividend authority restricted by
the
OTS. Savings institutions proposing to make any capital distribution within
these limits need only submit written notice to the OTS 30 days prior to such
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. Savings institutions that desire to
make
a larger capital distribution, or are under special restrictions, or are not,
or
would not be, well-capitalized following a proposed capital distribution,
however, must obtain OTS approval prior to making such distribution. See
“Regulatory Capital Requirements.”
Due
to
the impact that refinancing FHLB advances had on earnings in 2004, the Bank
cannot distribute capital to the Company unless it receives waivers of the
safe
harbor regulation from the OTS during the current waiver period. The Bank had
previously reported that a waiver would be required for capital distributions
through at least December 31, 2006. As a result of net interest margin
compression earnings may not be at the levels originally forecast, which would
likely result in a waiver being required through December 31, 2007. Currently,
the Bank has authorization from the OTS to distribute capital from the Bank
to
the Company through the quarter ending June 30, 2007. So long as the Bank
continues to maintain excess capital, operate in a safe and sound manner and
comply with the interest rate risk management guidelines of the OTS, it is
management’s belief that we will be able to continue to receive waivers to
distribute, from the Bank to the Company, capital equal to the earnings of
the
Bank.
Anti-Money
Laundering and Customer Identification
The
Bank
is subject to OTS regulations implementing the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act
of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal
government powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended
to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under
the
Commodity Exchange Act. Title III of the USA PATRIOT Act and the related OTS
regulations impose the following requirements with respect to financial
institutions:
· |
establishment
of anti-money laundering programs;
|
· |
establishment
of a program specifying procedures for obtaining identifying information
from customers seeking to open new accounts, including verifying
the
identity of customers within a reasonable period of
time;
|
· |
establishment
of enhanced due diligence policies, procedures and controls designed
to
detect and report money laundering;
|
· |
prohibitions
on correspondent accounts for foreign shell banks and compliance
with
record keeping obligations with respect to correspondent accounts
of
foreign banks.
|
Privacy
Standards
The
Bank
is subject to OTS regulations implementing the privacy protection provisions
of
the Gramm-Leach-Bliley Act. These regulations require the Bank to disclose
its
privacy policy, including identifying with whom it shares “non-public personal
information” to customers at the time of establishing the customer relationship
and annually thereafter.
The
regulations also require the Bank to provide its customers with initial and
annual notices that accurately reflect its privacy policies and practices.
In
addition, the Bank is required to provide its customers with the ability to
“opt-out” of having the Bank share their non-public personal information with
unaffiliated third parties, subject to certain exceptions.
The
Bank
is subject to regulatory guidelines establishing standards for safeguarding
customer information. The guidelines describe the agencies’ expectations for the
creation, implementation and maintenance of an information security program,
which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to ensure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience
to
any customer.
Qualified
Thrift Lender Test
All
savings associations, including the Bank, 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
in
qualified thrift investments (primarily residential housing related loans and
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 total
assets in those assets specified in Section 7701(a)(19) of the Internal Revenue
Code. At September 30, 2006, the Bank met the test and has always met the test.
Any
savings association 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 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. Such institution is limited to national bank branching and it
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 all investments and cease all activities not permissible
for a national bank. 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 “Regulation - Capitol Federal
Financial.”
Community
Reinvestment Act
Under
the
Community Reinvestment Act (“CRA”), as implemented by OTS regulations, any
federally chartered savings bank, including the Bank, has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet
the credit needs of its entire community, including low and moderate income
neighborhoods.
The CRA
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. The OTS must assess the Bank’s record of meeting the credit needs of
its community and take such record into account in its evaluation of certain
applications by the Bank.
Current
CRA regulations rate an institution based on its actual performance in meeting
community needs. In particular, the evaluation system focuses on three
tests:
· |
a
lending test, to evaluate the institution’s record of making loans in its
service areas;
|
· |
an
investment test, to evaluate the institution’s record of investing in
community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses;
and
|
· |
a
service test, to evaluate the institution’s delivery of services through
its branches, ATMs and other
offices.
|
The
CRA
also requires that CRA evaluations be public. The Bank has received a
“satisfactory” rating in its most recent CRA examination. All insured depository
institutions must publicly disclose certain agreements that are in fulfillment
of the CRA. The Bank has no such agreements in place at this time.
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 the Bank include MHC, the Company, and any
company which is under common control with the Bank. 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
OTS
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
restrictions under regulations enforced by the OTS. These regulations also
impose restrictions on loans to such persons and their related interests. Among
other things, such loans must generally be made on terms and conditions
substantially the same as for loans to unaffiliated individuals. As of September
30, 2006 management believes such loans were made under terms and conditions
substantially the same as loans made to unaffiliated individuals and otherwise
complied with applicable regulations.
Federal
Securities Law
The
common stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended. The Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of
the
SEC under the Securities Exchange Act of 1934.
The
Company stock held by persons who are affiliates of the Company 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. If the Company meets specified current public
information requirements, each affiliate of the Company will be able to sell
in
the public market, without registration, a limited number of shares in any
three-month period.
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which was signed into law in July
2002, impacts all companies with securities registered under the Securities
Exchange Act of 1934, including the Company. Sarbanes-Oxley created new
requirements in the areas of corporate governance and financial disclosure
including, among other things:
· |
increased
responsibility for Chief Executive Officers and Chief Financial Officers
with respect to the content of filings with the
SEC;
|
· |
enhanced
requirements for audit committees, including independence and disclosure
of expertise;
|
· |
enhanced
requirements for auditor independence and the types of non-audit
services
that auditors can provide;
|
· |
enhanced
requirements for controls and
procedures;
|
· |
accelerated
filing requirements for SEC
reports;
|
· |
disclosure
of a code of ethics; and
|
· |
increased
disclosure and reporting obligations for companies, their directors
and
their executive officers.
|
Certifications
of the Chief Executive Officer and the Chief Financial Officer as required
by
Sarbanes-Oxley and the resulting SEC rules can be found in the “Exhibits”
section of this Form 10-K.
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 accounts. At September 30, 2006, the Bank was
in
compliance with these reserve requirements.
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 FHLB
borrowings,
before borrowing from the Federal Reserve Bank.
The
Bank has not established the required relationship with the Federal Reserve
Bank
to borrow from the discount window.
Federal
Home Loan Bank System
The
Bank
is a member of FHLB Topeka, which is one of 12 regional Federal Home Loan Banks
that administers the home financing credit function of savings institutions.
Each FHLB serves as a reserve or central bank for its members within its
assigned region and is funded primarily from proceeds derived from the sale
of
consolidated obligations of the FHLB System. It makes loans or advances to
members in accordance with policies and procedures, established by the board
of
directors of FHLB, which are subject to the oversight of the Federal Housing
Finance Board. All advances from FHLB are required to be fully secured by
sufficient collateral as determined by FHLB. In addition, all long-term advances
are required to provide funds for residential home financing.
As
a
member, the Bank is required to purchase and maintain stock in FHLB. For the
year ended September 30, 2006, the Bank had an average outstanding balance
of
$174.1
million in FHLB stock, which was in compliance with this requirement. In past
years, the Bank has received substantial dividends on its FHLB stock. Over
the
past three fiscal years such dividends have averaged 4.62% and averaged 5.69%
for fiscal year 2006. For the year ended September 30, 2006, stock dividends
paid by FHLB to the Bank totaled $9.9 million.
Under
federal law FHLBs are required to provide funds for the resolution of troubled
savings institutions and for community investment and low- and moderate-income
housing. These contributions have affected adversely the level of FHLB dividends
paid and could continue to do so in the future. A reduction in value of the
Bank’s FHLB stock may result in a corresponding reduction in the Bank’s
capital.
Federal
Savings and Loan Holding Company Regulation
MHC
and
the Company are unitary savings and loan holding companies within the meaning
of
the Home Owners’ Loan Act (“HOLA”). As such, MHC and the Company are registered
with the OTS and are subject to the OTS regulations, examinations, supervision
and reporting requirements. In addition, the OTS has enforcement authority
over
MHC, the Company and the Bank. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious
risk
to the Bank.
The
HOLA
prohibits a savings and loan holding company (directly or indirectly, or through
one or more subsidiaries) from acquiring another savings association or holding
company thereof without prior written approval of the OTS; acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary savings
association, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA; or acquiring
or
retaining control of a depository institution that is not federally insured.
In
evaluating applications by holding companies to acquire savings associations,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
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 the Company or the Bank. Our federal income tax returns have been closed
without audit by the IRS for the fiscal years ended September 30, 2002 through
September 30, 2005 as of the close of business on December 15, 2005.
We
file a
consolidated federal income tax return using the accrual method of accounting.
To the extent of the Company’s accumulated earnings and profits, any cash
distributions made by the Company to its stockholders are considered to be
taxable dividends and not as a non-taxable return of capital to stockholders
for
federal and state tax purposes. The Bank maintains a tax-sharing agreement
with
the Company and its subsidiary to provide for the payment of taxes based upon
the taxable earnings of each company.
Bad
Debt Reserves. Prior
to
the Small Business Job Protection Act, the Bank 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 charge-off method in computing bad debt
deductions beginning with their 1996 federal tax return.
In
addition, federal legislation required the Bank 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
full amount of such reserve has been recaptured for the Bank. The Bank continues
to utilize the reserve method in determining its privilege tax obligations
to
the State of Kansas. 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 the Bank 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 the Bank make certain non-dividend distributions or cease
to
qualify as a Bank as defined in Code section 581.
State
Taxation
The
earnings of the Company may be combined with the Bank and its subsidiary for
purposes of the Kansas privilege tax if certain principles of unitary
relationships are maintained. Certain principles of unitary relationships are
currently maintained so the Company files a consolidated Kansas privilege tax
return. For Kansas privilege tax purposes, for taxable years beginning after
1997, the minimum tax rate is 4.5% of earnings, which is calculated based on
federal taxable income, subject to certain adjustments.
As
of
September 30, 2006, the Company is currently undergoing a Kansas state tax
audit
for the years ended
September 30, 2002, 2003 and 2004. Prior to September 30, 2006, the Company
received notification from the state of a potential net tax liability of $280
thousand for the years under audit. The Company did not accrue for the potential
net tax liability at September 30, 2006 as management believes the tax position
for the years under audit is defendable. The Company intends to pursue all
opportunities available in defending the tax position taken on the tax returns
under audit.
Employees
At
September 30, 2006, we had a total of 738 employees, including 142 part-time
employees. Our employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Executive
Officers of the Registrant
John
C. Dicus.
Age 73
years. Mr. Dicus is Chairman of the Board of Directors. He has served the Bank
in various capacities since 1959. He served as President of the Bank from 1969
until 1996. He has served as Chairman of the Bank since 1989 and of the Company
since its inception in March 1999. He also served as Chief Executive Officer
of
the Bank from 1989 to January 2003, and of the Company from March 1999 until
January 2003. He is the father of Mr. John B. Dicus.
John
B. Dicus.
Age 45
years. Mr. Dicus is Chief Executive Officer and President of the Bank and the
Company. He took over the responsibilities of Chief Executive Officer effective
January 1, 2003. He has served as President of the Bank since 1996 and of the
Company since its inception in March 1999. Prior to accepting the
responsibilities of CEO he served as Chief Operating Officer of the Bank and
the
Company. Prior to that, he served as the Executive Vice President of Corporate
Services for the Bank for four years. He has been with the Bank in various
other
positions since 1985. He is the son of Mr. John C. Dicus.
M.
Jack Huey.
Age 57
years. Mr. Huey has served as Executive Vice President and Chief Lending Officer
of the Bank since June 2002. Since June 2002 he has also served as President
of
Capitol Funds Inc., a subsidiary of the Bank. Since August 2002, he has served
as President of CFMRC. Prior to that, he served as the Central Region Lending
Officer since joining the Bank in 1991.
Larry
K. Brubaker.
Age 59
years. Mr. Brubaker has been employed with the Bank 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
the Bank as the Eastern Region Manager for seven years.
R.
Joe Aleshire.
Age 59
years. Mr. Aleshire has been employed with the Bank 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
the Bank as the Wichita Area Manager for 17 years.
Kent
G. Townsend.
Age 45
years. Mr. Townsend serves as Executive Vice President, Chief Financial Officer
and Treasurer of the Bank and the Company. Mr. Townsend was promoted to
Executive Vice President, Chief Financial Officer and Treasurer on September
1,
2005. Prior to that, he served as Senior Vice President, a position he held
since April 1999, and Controller of the Company, a position he held since March
1999. He has served in similar positions
with
the
Bank since September 1995. He served as the Financial Planning and Analysis
Officer with the Bank for three years and other financial related positions
since joining the Bank in 1984.
Tara
D. Van Houweling.
Age 33
years. Ms. Van Houweling has been employed with the Bank and Company since
May
2003 and currently serves as First Vice President, Principal Accounting Officer
and Reporting Director. She has held the position of Reporting Director since
May 2003. Prior to being employed by the Bank and Company, Ms. Van Houweling
was
the Assistant Controller for First Specialty Insurance Corporation, a subsidiary
of Employers Reinsurance Corporation from August 2002 to May 2003. Prior to
that, Ms. Van Houweling was employed by Deloitte & Touche, LLP in the Audit
Services Department as an Audit Senior and then Audit Manager from June 1999
to
August 2002.
The
following is a summary of risk factors relating to the operations of the Bank
and the Company. These risk factors are not necessarily presented in order
of
significance.
Changes
in interest rates could have an adverse impact on our results of operations
and
financial condition.
The
Company’s results of operations are primarily dependent on net interest income,
which is the difference between the interest earned on loans, mortgage-related
securities, and investments, and the interest paid on deposits and borrowings.
Changes in interest rates could have an adverse impact on our results of
operations and financial condition because the majority of our interest-earning
assets are long-term, fixed-rate loans, while the majority of our
interest-bearing liabilities are shorter term, and therefore subject to a
greater degree of fluctuation. This type of risk is known as interest rate
risk,
and is affected by prevailing economic and competitive conditions.
During
the majority of fiscal year 2006, the yield curve was flat or slightly inverted,
which generally means the yield on treasuries with maturities longer than one
year were either slightly lower than longer-term treasuries, equaled or exceeded
the yield on long-term treasuries. This yield curve environment sustained the
compression of the Company’s net interest margin during fiscal year 2006. The
forward yield curve generally indicates that the market expects interest rates
on treasury securities across all maturities to remain generally flat, with
changes in rates of less than 25 basis points, through the first fiscal quarter
of 2007. Although management continuously monitors the interest rate risk
profile of the Bank, and is currently undertaking strategies to modify the
Bank’s interest rate risk sensitivity, the current inverted-to-flat yield curve
scenario is likely to cause a continuation of the net interest margin
compression.
The
impact of changes in interest rates on assets is generally observed on the
balance sheet and income statement in later periods than the impact of changes
on liabilities due to the duration of assets vs. liabilities, and also to the
time lag between our commitment to originate or purchase a loan and the time
we
fund the loan, during which time interest rates may change. Interest-bearing
liabilities tend to reflect changes in interest rates immediately, so the
difference in timing may have an adverse effect on our net interest
income.
Changes
in interest rates can also have an adverse effect on our financial condition,
as
our trading securities and available-for-sale securities are reported at their
estimated fair value, and therefore are impacted by fluctuations in interest
rates. We record changes in the estimated fair value of our trading securities
in the consolidated statement of income. We increase or decrease our
stockholders’ equity by the amount of change in the estimated fair value of the
available-for-sale securities.
Changes
in interest rates as they relate to customers can also have an adverse impact
on
our financial condition and results of operations. In times of rising interest
rates, default risk may increase among customers with adjustable-rate loans.
Rising interest rate environments also entice customers with adjustable-rate
loans to refinance into fixed-rate loans which further exposes the Bank to
interest rate risk if refinanced internally. If the loan is refinanced
externally, the Bank could be unable to reinvest cash received from the
resulting prepayments at rates comparable to existing securities and loans,
which subjects the Bank to reinvestment risk. Generally, prepayments occur
in
decreasing interest rate environments, so the payments received will be invested
at the prevailing (decreasing) market rate. An influx of prepayments can result
in an excess of liquidity, which could impact our net interest income if
profitable reinvestment opportunities are not immediately available. Whereas
prepayment rates are based on demographics, local economic factors, and
seasonality, the main factors affecting prepayment rates are prevailing interest
rates and competition. Fluctuations in interest rates also affect customer
demand for deposit products. Local competition for deposit dollars could affect
our ability to attract deposits, or could result in us paying more for
deposits.
Our
level
of assets directly impacts the calculation of capital for the purposes of
regulation by the OTS. The OTS Thrift Bulletin 13a provides guidance on the
management of interest rate risk through analysis of the change in net
portfolio
value.
Net portfolio value is defined as the net present value of the expected future
cash flows of an entity’s assets and liabilities. The OTS oversees the general
safety and soundness of savings associations, and therefore retains the right
to
impose minimum capital requirements on institutions based upon the institutions
compliance with written standards concerning net portfolio value analysis.
Our
strategies to modify our interest rate risk profile may be difficult to
implement and may shrink our balance sheet. We
are
currently undertaking asset management strategies designed to decrease our
interest rate risk sensitivity. One such strategy is increasing the amount
of
adjustable-rate and/or short-term assets. We believe that the market anticipates
interest rates to be flat or decreasing, which would generally create a decrease
in borrower demand for adjustable-rate assets. An increase in investor demand
for short-term assets could be reflected in premiums paid for adjustable-rate
investments, or a reduction in yields earned on short-term assets. Additionally,
there is no guarantee that any adjustable-rate assets obtained will not prepay.
If we are unable to originate or purchase adjustable-rate assets at favorable
rates, we may have difficulty executing this asset management strategy and/or
it
may result in a reduction in profitability.
Management
is also considering paying off some portion of maturing FHLB advances, rather
than renewing the advances, during fiscal year 2007. This strategy will most
likely result in balance sheet shrinkage.
Changes
in laws, government regulation, and monetary policy may have a material effect
on our results of operations. The
Bank,
as a federally chartered savings institution, is subject to federal regulation,
and as a thrift institution, is subject to oversight by the OTS extending to
all
aspects of its operations. The Bank is also subject to regulation by the FDIC,
which insures the deposits of the Bank to the maximum extent permitted by law,
and to requirements established by the Federal Reserve Board. Proposals for
further regulation of the financial services industry are continually being
introduced in Congress and various state legislatures. The Bank’s ability to
lend funds or pay dividends is contingent upon satisfaction of certain
regulatory criteria and standards, such as capital levels, classification of
assets, and establishment of loan loss reserves. Such regulation and supervision
is intended to protect depositors and not necessarily for the purpose of
protecting stockholders. 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. Government agencies have substantial discretion
to
impose significant monetary penalties upon institutions who do not comply with
regulations. Any change in such regulations, or violation of such regulations,
whether by the FDIC, the OTS, the Federal Reserve Board, Congress or states
in
which we do business, could have a material adverse impact on MHC, the Company
and the Bank and their operations.
The
Company’s ability to pay dividends is subject to the ability of the Bank to make
capital distributions to the Company and the waiver of dividends by MHC.
The
long-term ability of the Company to pay dividends to its stockholders is based
primarily upon the ability of the Bank to make capital distributions to the
Company. Under OTS safe harbor regulations, the Bank may distribute to the
Company capital not exceeding net income for the current calendar year and
the
prior two calendar years. Due to the impact refinancing the FHLB advances had
on
earnings in fiscal year 2004, the Bank cannot distribute capital to the Company
unless it receives waivers of the safe harbor regulation from the OTS during
the
current waiver period. We believe the Bank will be required to receive a waiver
for capital distributions through at least December 31, 2007. This date may
change depending on the Bank’s earnings. Currently, the Bank has authorization
from the OTS to distribute capital from the Bank to the Company through the
quarter ending June 30, 2007. So long as the Bank continues to maintain excess
capital, operate in a safe and sound manner, and comply with the interest rate
risk management guidelines of the OTS, it is management’s belief that the Bank
will continue to receive waivers allowing it to distribute the net income of
the
Bank to the Company, although no assurance can be given in this regard.
MHC
owns
approximately 70% of the Company’s outstanding stock. MHC waives its right to
dividends on the shares that it owns, which means the amount of dividends paid
to public shareholders is significantly higher than it would be if MHC accepted
dividends. MHC is not required to waive dividends, but the Company expects
this
practice to continue indefinitely. As such, MHC is required to obtain a waiver
from the OTS allowing it to waive its right to dividends. The current waiver
is
effective through June 2007.
The
geographic concentration of our loan portfolio and lending activities makes
us
vulnerable to a downturn in the local economy.
We are
currently one of the largest mortgage loan originators in the State of Kansas.
79% of our loan portfolio is comprised of loans secured by property located
in
the market areas in which we do business. This makes us vulnerable to a downturn
in the local economy and real estate markets. Adverse conditions in the
local
economy
such as inflation, unemployment, recession, or other factors beyond our control
could impact the ability of our borrowers to repay their loans, which could
impact our net interest income. Decreases in local real estate values could
adversely affect the value of the property used as collateral for our loans,
which could cause the Bank to realize a loss in the event of a foreclosure.
Currently there is not a single employer or industry in the area on which the
majority of our customers are dependent. For additional information on the
local
economy, see “Item 1. Business - Market Area and Competition.”
Strong
competition may limit growth and profitability. As
previously discussed, we are one of the largest loan originators in the State
of
Kansas, but we compete in the same market areas as local, regional, and national
banks, commercial banks, credit unions, mortgage brokerage firms, investment
banking firms, investment brokerage firms, and savings institutions. We must
also compete with online investment and mortgage brokerages and online banks
that are not confined to any specific market area. Many of these competitors
operate on a national or regional level, are a conglomerate of various financial
services housed under one roof, or otherwise have substantially greater
financial or technological resources than the Company. We compete primarily
on
the basis of the interest rates offered to depositors and the terms of loans
offered to borrowers. Should
we
face competitive pressure to increase deposit rates or decrease loan rates,
our
net interest income could be adversely affected.
Additionally, our competitors may offer products and services that we do not
or
cannot provide, as certain deposit and loan products fall outside of our
acceptable level of risk. The Company’s profitability depends upon its ability
to compete in its market areas.
None.
At
September 30, 2006, we had 29 traditional branch offices and nine in-store
branch offices. The Bank owns the office building in which its home office
and
executive offices are located. At September 30, 2006, the Bank
owned 24 of its other branch offices and the remaining 13 branch offices,
including nine in-store locations, were leased.
For
additional information regarding our lease obligations, see “Note 6 of the
Consolidated Financial Statements” of the attached Annual Report to Stockholders
for the year ended September 30, 2006.
Management
believes that our current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company.
The
Company and the Bank are involved as plaintiff or defendant in various legal
actions arising in the normal course of business. In our opinion, after
consultation with legal counsel, we believe it unlikely that such pending legal
actions will have a material adverse effect on our financial condition, results
of operations or liquidity.
No
matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the quarter ended September 30, 2006.
PART
II
The
section entitled “Stockholder Information” of the attached Annual Report to
Stockholders for the year ended September 30, 2006 is incorporated herein by
reference.
See
“Note
1 of the Consolidated Financial Statements” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Capital” of the
attached Annual Report to Stockholders for the year ended September 30, 2006
regarding the OTS restrictions on dividends from the Bank to the
Company.
The
following table summarizes our share repurchase activity during the three months
ended September 30, 2006 and additional information regarding our share
repurchase program. The repurchase plan of 1,536,102 shares was completed on
September 26, 2006. On May 26, 2006, the board of directors approved a new
stock
repurchase program. Under the new plan, the Company may repurchase up to 500,000
shares from time to time, depending on market conditions and other factors,
in
open-market and other transactions. The shares would be held as treasury stock
for general corporate use. The plan has no expiration date and had 499,661
shares remaining as of September 30, 2006.
|
Total
|
|
Total
Number of
|
Maximum
Number
|
|
Number
of
|
Average
|
Shares
Purchased as
|
Of
Shares that May
|
|
Shares
|
Price
Paid
|
Part
of Publicly
|
Yet
Be Purchased
|
Period
|
Purchased
|
per
Share(1)
|
Announced
Plans
|
Under
the Plan
|
July
1, 2006 through
|
|
|
|
|
July
31, 2006
|
7,289
|
33.81
|
7,289
|
545,065
|
August
1, 2006 through
|
|
|
|
|
August
31, 2006
|
29,697
|
33.71
|
29,697
|
515,368
|
September
1, 2006 through
|
|
|
|
|
September
30, 2006
|
15,707
|
35.11
|
15,707
|
499,661
|
Total
|
52,693
|
34.14
|
52,693
|
499,661
|
(1) |
Reflects
the average price paid per share to purchase the shares acquired
in the
open market.
|
The
section entitled “Selected Consolidated Financial Data” of the attached Annual
Report to Stockholders for the fiscal years ended September 30, 2002 through
September 30, 2006 is incorporated herein by reference.
The
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of the attached Annual Report to Stockholders for the
year ended September 30, 2006 is incorporated herein by reference.
The
section entitled “Management Discussion of Financial Condition and Results of
Operations
-
Quantitative and Qualitative Disclosure about Market Risk” of the attached
Annual Report to Stockholders for the year ended September 30, 2006 is
incorporated herein by reference.
The
section entitled “Consolidated Financial Statements” of the attached Annual
Report to Stockholders for the fiscal year ended September 30, 2006 is
incorporated herein by reference.
None.
Evaluation
of Disclosure Controls and Procedures
John
B.
Dicus, the Company’s President and Chief Executive Officer, and Kent G.
Townsend, the Company’s Executive Vice President, Chief Financial Officer and
Treasurer, have evaluated the Company’s disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended,
the “Act”) as of September 30, 2006. Based upon their evaluation, they have
concluded that as of September 30, 2006, such disclosure controls and procedures
were effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Act is accumulated and
communicated to the Company’s management (including the Chief Executive Officer
and Chief Financial Officer) to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported within the
time
periods specified in the SEC’s rules and forms.
Management’s
report on our internal control over financial reporting and the report thereon
of our independent registered public accounting firm are contained in the
attached Annual Report to Stockholders for the fiscal year ended September
30,
2006 and incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) of
the
Act that occurred during the Company’s last fiscal quarter ended September 30,
2006 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
PART
III
Information
required by this item concerning the Company’s directors and compliance with
section 16(a) of the Act is incorporated herein by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held
in
January 2007, except for information contained under the heading “Compensation
Committee Report on Executive Compensation”, “Report of the Audit Committee of
the Board of Directors” and “Stockholder Return Performance Presentation”, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Pursuant
to General Instruction G(3), information concerning executive officers of the
Company is included in Part I, under the caption “Executive Officers” of this
Form 10-K.
Information
required by this item regarding the audit committee of the Company’s board of
directors, including information regarding the audit committee financial expert
serving on the audit committee, is incorporated herein by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held
in
January 2007, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Code
of Ethics
We
have
adopted a written code of ethics within the meaning of Item 406 of SEC
Regulation S-K that applies to our principal executive officer and senior
financial officers, and to all of our other employees and our directors, a
copy
of which is available free of charge by contacting Jim Wempe, our Investor
Relations Officer, at (785) 270-6055 or from our Internet website
(www.capfed.com).
Information
required by this item concerning compensation is incorporated herein by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held in January 2007, except for information contained under
the heading “Compensation Committee Report on Executive Compensation”, “Report
of the Audit Committee of the Board of Directors” and “Stockholder Return
Performance Presentation”, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Information
required by this item concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held in January 2007,
except for information contained under the heading “Compensation Committee
Report on Executive Compensation”, “Report of the Audit Committee of the Board
of Directors” and “Stockholder Return Performance Presentation”, a copy of which
will be filed not later than 120 days after the close of the fiscal
year.
The
following table sets forth information as of September 30, 2006 with respect
to
compensation plans under which shares of our common stock may be issued:
Equity
Compensation Plan Information
|
|
|
|
Number
of Shares
|
|
|
|
Remaining
Available
|
|
|
|
for
Future Issuance
|
|
Number
of Shares
|
|
Under
Equity
|
|
to
be issued upon
|
Weighted
Average
|
Compensation
Plans
|
|
Exercise
of
|
Exercise
Price of
|
(Excluding
Shares
|
|
Outstanding
Options,
|
Outstanding
Options,
|
Reflected
in the
|
Plan
Category
|
Warrants
and Rights
|
Warrants
and Rights
|
First
Column)
|
|
|
|
|
Equity
compensation plans approved
|
|
|
|
by
stockholders
|
668,457
|
$20.43
|
563,305(1)
|
Equity
compensation plans not approved
|
|
|
|
by
stockholders
|
N/A
|
N/A
|
N/A
|
Total
|
668,457
|
$20.43
|
563,305
|
(1)
This
amount includes 180,587 shares issuable under the Company's Recognition and
Retention Plan.
Information
required by this item concerning certain relationships and related transactions
is incorporated herein by reference from the definitive proxy statement for
the
Annual Meeting of Stockholders to be held in January 2007,
except
for information contained under the heading “Compensation Committee Report on
Executive Compensation”, “Report of the Audit Committee of the Board of
Directors” and “Stockholder Return Performance Presentation”, a copy of which
will be filed not later than 120 days after the close of the fiscal
year.
Information
required
by this item concerning principal accountant fees and services is incorporated
herein by reference from the definitive proxy statement for the Annual Meeting
of Stockholders to be held in January 2007, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
PART
IV
(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 Registered Public Accounting Firm.
|
2. Consolidated
Balance Sheets as of September 30, 2006 and 2005.
|
3. Consolidated
Statements of Income for the Years Ended September 30, 2006, 2005
and
2004.
|
4. Consolidated Statements of Stockholders’ Equity
for the Years Ended September 30, 2006, 2005 and 2004.
|
5. Consolidated
Statements of Cash Flows for the Years Ended September 30, 2006,
2005 and
2004.
|
6. Notes
to Consolidated Financial Statements for the Years Ended September
30,
2006, 2005 and 2004.
|
(2) Financial
Statement Schedules:
All
financial statement schedules have been omitted as the information is not
required under the related instructions or is not applicable.
(3) Exhibits:
See
Index
to Exhibits.
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 14, 2006
|
By:
|
/s/
John B. Dicus
|
|
|
|
John
B. Dicus, President and
|
|
|
|
Chief
Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
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 date
indicated.
|
|
|
|
|
|
|
|
|
By:
|
/s/
John B. Dicus
|
By:
|
/s/
B. B. Andersen
|
|
John
B. Dicus, President
|
|
B.
B. Andersen, Director
|
|
and
Chief Executive Officer
|
|
Date:
December 14, 2006
|
|
(Principal
Executive Officer)
|
|
|
|
Date:
December 14, 2006
|
|
|
|
|
|
|
By:
|
/s/
John C. Dicus
|
By:
|
/s/
Michael T. McCoy, M.D.
|
|
John
C. Dicus, Chairman of the Board
|
|
Michael
T. McCoy, M.D., Director
|
|
Date:
December 14, 2006
|
|
Date:
December 14, 2006
|
|
|
|
|
|
|
|
|
By:
|
/s/
Kent G. Townsend
|
By:
|
/s/
Marilyn S. Ward
|
|
Kent
G. Townsend, Executive Vice President,
|
|
Marilyn
S. Ward, Director
|
|
Chief
Financial Officer and Treasurer
|
|
Date:
December 14, 2006
|
|
(Principal
Financial Officer)
|
|
|
|
Date:
December 14, 2006
|
|
|
|
|
|
|
By:
|
/s/
Jeffrey R.
Thompson
|
By:
|
/s/
Tara D. Van Houweling
|
|
Jeffrey
R. Thompson, Director
|
|
Tara
D. Van Houweling, First Vice President
|
|
Date:
December 14, 2006
|
|
and
Reporting Director
|
|
|
|
(Principal
Accounting Officer)
|
By:
|
/s/
Jeffrey M. Johnson
|
|
Date:
December 14, 2006
|
|
Jeffrey
M. Johnson, Director
|
|
|
|
Date:
December 14, 2006
|
|
|
|
|
|
|
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 filed on August 4, 2004 as Exhibit 3(ii)
to
|
|
|
the
June 30, 2004 Form 10-Q
|
4(i)
|
|
Form
of Stock Certificate of Capitol Federal Financial*
|
4(ii)
|
|
The
Registrant agrees to furnish to the Securities and Exchange Commission,
upon request, the
|
|
|
instruments
defining the rights of the holders of the Registrant’s long-term debt.
|
10.1
|
|
Registrant’s
Thrift and Stock Ownership Plan filed on December 14, 2005 as Exhibit
10.1
to
|
|
|
the
Annual Report on Form 10-K
|
10.2
|
|
Registrant’s
2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
April 13,
|
|
|
2000
as Appendix A to Registrant’s Revised Proxy Statement (File No.
000-25391)
|
10.3
|
|
Registrant’s
2000 Recognition and Retention Plan (the “RRP) filed on April 13, 2000 as
|
|
|
Appendix
B to Registrant’s Revised Proxy Statement (File No.
000-25391)
|
10.4
|
|
Capitol
Federal Financial Deferred Incentive Bonus Plan
|
|
|
|
10.5
|
|
Form
of Incentive Stock Option Agreement under the Stock Option Plan filed
on
February 4, 2005
|
|
|
as
Exhibit 10.5 to the December 31, 2004 Form 10-Q
|
10.6
|
|
Form
of Non-Qualified Stock Option Agreement under the Stock Option Plan
filed
on February 4,
|
|
|
2005
as Exhibit 10.6 to the December 31, 2004 Form 10-Q
|
10.7
|
|
Form
of Restricted Stock Agreement under the RRP filed on February 4,
2005 as
Exhibit 10.7 to the
|
|
|
December
31, 2004 Form 10-Q
|
10.8
|
|
Description
of Named Executive Officer Salary and Bonus Arrangements
|
|
|
|
10.9
|
|
Description
of Director Fee Arrangements filed on February 6, 2006 as Exhibit
10.9 to
the
|
|
|
December
31, 2005 Form 10-Q
|
10.10
|
|
Short-term
Performance Plan filed on December 14, 2005 as Exhibit 10.10 to the
Annual
|
|
|
Report
on Form 10-K for the fiscal year ended September 30,
2005
|
11
|
|
Statement
re: computation of earnings per share**
|
13
|
|
Annual
Report to Stockholders
|
14
|
|
Code
of Ethics***
|
21
|
|
Subsidiaries
of the Registrant
|
23
|
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
|
Certification
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by
John B.
Dicus, President and Chief Executive Officer
|
31.2
|
|
Certification
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by
Kent G.
Townsend, Executive Vice President, Chief Financial Officer and
Treasurer
|
32
|
|
Certification
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section
906 of
the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chief Executive
Officer and President, and Kent G. Townsend, Executive Vice President,
Chief Financial Officer and Treasurer
|
*Incorporated
by reference from Capitol Federal Financial’s Registration Statement on Form S-1
(File No. 333-68363) filed on February 11, 2000, as amended and declared
effective on the same date.
**No
statement is provided because the computation of per share earnings on both
a
basic and fully diluted basis can be clearly determined from the Financial
Statements included in the 2006 Annual Report to Stockholders, filed
herewith.
***May
be obtained free of charge from the Registrant’s Investor Relations Officer by
calling (785) 270-6055 or from the Registrant’s internet website at
www.capfed.com.