Business Context and Reporting Period
This Form 10-K covers the fiscal year ended September 30, 2010, for Capitol Federal Financial, Inc. (the "Registrant") and its subsidiary, Capitol Federal Savings Bank (the "Bank"). The Registrant was organized to facilitate a "second-step" conversion from a mutual holding company structure to a stock holding company structure. As of the filing date, the Registrant had no significant assets, liabilities, or operations, with separate financial statements omitted. The report primarily details the operations of the Bank, a federally chartered savings bank headquartered in Topeka, Kansas, serving markets in Kansas and Missouri.
Key Financial Metrics
As of September 30, 2010, the Bank reported the following financial position:
- Total Assets: $8.49 billion
- Total Loans: $5.17 billion (94% one-to-four-family residential)
- Total Deposits: $4.39 billion
- Total Equity: $962.0 million
- Allowance for Loan Losses (ALLL): $14.9 million (0.29% of total loans)
- Non-Performing Assets: $41.9 million (0.49% of total assets)
- Regulatory Capital: The Bank was classified as "well-capitalized" with a Tier 1 risk-based capital ratio of 23.5% and a total risk-based capital ratio of 23.8%.
Revenue is derived principally from interest on loans, mortgage-backed securities (MBS), and investment securities. The Bank holds $2.94 billion in investment and MBS securities.
Material Changes Versus Prior Period
Comparing the fiscal year ended September 30, 2010, to September 30, 2009:
- Loan Portfolio: Total loans decreased by approximately $438 million to $5.17 billion. One-to-four-family loans decreased by $406.3 million (7.6%) due to repayments and reduced originations.
- Investment Securities: The portfolio increased by $852.0 million to $1.33 billion, driven by purchases of short-term securities and a loan swap transaction.
- Mortgage-Backed Securities (MBS): The MBS portfolio decreased by $384.6 million to $1.61 billion as principal repayments were reinvested into shorter-term securities.
- Asset Quality: Non-performing loans increased by $1.1 million to $32.0 million. This was driven by a $3.6 million increase in originated loans, partially offset by a $2.9 million decrease in purchased loans. Net charge-offs were $4.0 million, up from $2.0 million in the prior year.
- Provision for Loan Losses: Increased to $8.9 million from $6.4 million in the prior year, reflecting higher loss factors and specific valuation allowances on purchased loans.
- Deposits: Increased by $157.7 million to $4.39 billion.
Outlook, Risks, and Management Commentary
Conversion Status: The mutual-to-stock conversion is expected to be consummated in the fourth quarter of calendar year 2010. The plan was conditionally approved by the Office of Thrift Supervision (OTS) and approved by MHC members, pending final regulatory approvals and a stockholder vote scheduled for December 15, 2010.
Management Commentary: Management notes that while local market areas did not experience significant home value fluctuations compared to other U.S. regions, the Bank has seen an increase in non-performing purchased loans due to elevated unemployment and declining real estate values. The Bank has maintained conservative underwriting standards, requiring full documentation for all loans.
Risks and Contingencies:
- Economic Conditions: Continued weakness in the U.S. economy and high unemployment could adversely affect credit performance and loan demand.
- Interest Rate Risk: The Bank has a positive gap position (21.06% excess of interest-earning assets over liabilities), meaning net interest income could decrease in a falling rate environment.
- Regulatory Changes: The Dodd-Frank Act is expected to increase operational and compliance costs and may alter the regulatory structure (eliminating the OTS).
- FDIC Assessments: Higher FDIC insurance premiums and special assessments have increased expenses. The Bank prepaid $25.7 million in assessments for 2010-2012.
- Investment Portfolio Risk: Significant exposure to GSEs (FNMA/FHLMC) in the MBS portfolio carries risk if federal support is reduced.
Investor Verification Checklist
- Verify the final approval and completion date of the mutual-to-stock conversion and the associated public offering.
- Monitor the trend of non-performing loans, specifically the ratio of purchased loans to originated loans, as purchased loans have shown higher delinquency rates.
- Review the adequacy of the Allowance for Loan Losses (ALLL) given the increase in net charge-offs and the concentration of loans in Kansas and Missouri.
- Assess the impact of the Dodd-Frank Act on future capital requirements and operational costs.
- Confirm the Bank's ability to maintain its "well-capitalized" status under OTS regulations to ensure continued dividend distribution capabilities.