Market for the Common Stock

 

Shares of CFF common stock currently trade on the Nasdaq Global Select Market under the symbol CFFN.  Upon completion of the conversion, the shares of common stock of Capitol Federal Financial, Inc. will replace CFF’s existing shares.  We expect that Capitol Federal Financial, Inc.’s shares of common stock will trade on the Nasdaq Global Select Market under the trading symbol CFFND for a period of 20 trading days following the completion of the offering.  Thereafter, the trading symbol will revert to CFFN.  In order to list our common stock on the Nasdaq Global Select Market, we are required to have at least three broker-dealers who will make a market in our common stock.  CFF currently has 21   registered market makers.  Persons purchasing shares of common stock in the offering may not be able to sell their shares at or above the $10.00 price per share.

 

 

Our Contribution of Cash to the Capitol Federal Foundation

 

To further our commitment to the communities we serve and may serve in the future, subject to our members’ and stockholders’ approval, we intend to contribute funds to the Capitol Federal Foundation as part of the conversion.  Capitol Federal Financial, Inc. intends to contribute to the charitable foundation $40.0   million in cash.  As a result of the cash contribution, we expect to record an after-tax expense of approximately $24.7   million during the quarter in which the conversion is completed.

 

Under the Internal Revenue Code, a corporate entity is generally permitted to deduct up to 10% of its taxable income (taxable income before the charitable contributions deduction) in any one year for charitable contributions.  Any contribution in excess of the 10% limit may generally be deducted for federal income tax purposes over the five years following the year in which the charitable contribution was made.  Accordingly, a charitable contribution by a corporate entity to a charitable foundation could, if necessary, be deducted for federal income tax purposes over a six-year period.  Our overall charitable contribution deduction could be limited if our future taxable income is insufficient to allow for the full deduction within the 10% of taxable income limitation, which would result in an increase to income tax expense.

 

The Capitol Federal Foundation is governed by a board of trustees, which currently consists of John C. Dicus, the former Chairman of the Board of Capitol Federal Savings Bank and CFF, John B. Dicus, the Chairman, President and Chief Executive Officer of Capitol Federal Savings Bank and CFF, and Rick C. Jackson, Executive Vice President and Chief Lending Officer of Capitol Federal Savings Bank and two individuals who are not affiliated with us.  None of these individuals will receive compensation for their service as a trustee of the charitable foundation.  In addition, some of our employees will serve as executive officers of the charitable foundation.  None of these individuals will receive compensation for their service as an executive officer of the charitable foundation.

 

The Capitol Federal Foundation will continue to support charitable causes and community development activities in the communities in which we operate or may operate.    During the three months ended December 31, 2009 and the years ended September 30, 2009 and 2008, the Capitol Federal Foundation made charitable contributions of $1.6 million, $3.8 million and $3.7 million, respectively.  The charitable foundation emphasizes grants and donations to four areas of focus: housing initiatives; education; United Way; and traditional community projects.

 

The contribution of cash to the charitable foundation has been approved by the board of directors of Capitol Federal Savings Bank MHC, and must be approved by the members of Capitol Federal Savings Bank MHC and the stockholders of CFF at their special meetings being held to consider and vote upon the plan of conversion and reorganization.  If members or stockholders do not approve the contribution to the charitable foundation, we will proceed with the conversion without contributing to the foundation and subscribers for common stock will not be resolicited (unless required by the Office of Thrift Supervision).  Without the contribution to the charitable foundation, RP Financial, LC. estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be issued in the offering.

 

     RP Financial, LC. will update its appraisal of our estimated pro forma market value at the conclusion of the offering.  The pro forma market value reflected in that updated appraisal will be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions, as well as whether we will make the proposed contribution to the charitable foundation.

 

     See “Risk Factors — The contribution to the charitable foundation will adversely affect net income,” “Risk Factors — Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits,” “Comparison of Valuation and Pro Forma Data With and Without the Charitable Foundation” and “Capitol Federal Foundation.”

 

 

Tax Consequences

 

As a general matter, the conversion will not be a taxable transaction for federal or state income tax purposes to Capitol Federal Savings Bank MHC, CFF, Capitol Federal Savings Bank, Capitol Federal Financial, Inc., persons eligible to subscribe in the subscription offering or existing stockholders of CFF.  The position stated above with respect to no tax consequences arising from the issuance or receipt of subscription rights is based upon a reasoned opinion by counsel that subscription rights do not have any ascertainable value at the time of receipt and is supported by the opinion of RP Financial LC. to the effect that the subscription rights have no value at the time of receipt or exercise. See “The Conversion and Offering – Material Income Tax Consequences.”  Existing stockholders of CFF who receive cash in lieu of fractional share interests in shares of Capitol Federal Financial, Inc. common stock will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

 

Persons Who May Order Shares of Common Stock in the Offering

 

Subscription rights to purchase shares of common stock in the subscription offering have been granted in the following descending order of priority:

 

(i)

First, to depositors with accounts at Capitol Federal Savings Bank with aggregate balances of at least $50.00 at the close of business on March 31, 2009.

 

(ii)

Second, to our tax-qualified employee benefit plans, including our employee stock ownership plan, which will receive nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering.  We expect our employee stock ownership plan to purchase up to 4.0% of the shares of common stock sold in the offering.

 

(iii)

Third, to depositors with accounts at Capitol Federal Savings Bank with aggregate balances of at least $50.00 at the close of business on [      ] , 2010.

 

(iv)

Fourth, to depositors of Capitol Federal Savings Bank at the close of business on [      ] , 2010 and borrowers of Capitol Federal Savings Bank as of January 6, 1993 and [       ] , 2010.

 

Shares of common stock not purchased in the subscription offering will be offered for sale to the general public in a community offering, with a preference given first to natural persons residing in the counties and metropolitan statistical areas in which we have offices; and then to CFF public stockholders as of [      ] , 2010.  The community offering will begin concurrently with the subscription offering.

 

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order.  Shares will be allocated first to categories in the subscription offering in accordance with the plan of conversion and reorganization.  A detailed description of share allocation procedures can be found in the section of this prospectus entitled “The Conversion and Offering.”

 

In addition, any shares of our common stock not purchased in the subscription offering or community offering are expected to be offered for sale to the general public in a syndicated community offering through a syndicate of selected dealers.  We may begin the syndicated community offering at any time following the commencement of the subscription offering.  Sandler O’Neill & Partners, L.P. will act as sole book-running manager and Keefe, Bruyette & Woods, Inc. is acting as co-manager for the syndicated community offering, which is also being conducted on a best efforts basis.  The syndicated community offering will terminate no later than 45 days after the expiration of the subscription offering, unless extended by us with approval of the Office of Thrift Supervision.  Neither Sandler O’Neill & Partners, L.P., Keefe, Bruyette & Woods, Inc.   nor any other member of the syndicate is required to purchase any shares in the syndicated community offering.  Alternatively, we may sell any remaining shares in an underwritten public offering, which would be conducted on a firm commitment basis.  See “The Conversion and Offering — Syndicated Community Offering.”

 

How You May Purchase Shares of Common Stock

 

In the subscription and community offerings, you may pay for your shares only by:

 

 

(i)

personal check, bank check or money order made payable directly to Capitol Federal Financial, Inc.; or

 

(ii)

authorizing us to withdraw funds from the Capitol Federal Savings Bank deposit accounts designated on the stock order form.

 

Capitol Federal Savings Bank is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering.  Additionally, you may not use a Capitol Federal Savings Bank line of credit check or any type of third party check or wire transfer to pay for shares of common stock.  Please do not submit cash.

 

You may purchase shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment payable to Capitol Federal Financial, Inc. or authorization to withdraw funds from one or more of your Capitol Federal Savings Bank deposit accounts, provided that we receive the stock order form before 4:00 p.m., Central Time, on [      ] , 2010, which is the end of the subscription and community offering period.  Checks and money orders will be immediately deposited in a segregated account with Capitol Federal Savings Bank or another insured depository institution upon receipt.  We will pay interest calculated at Capitol Federal Savings Bank’s statement savings rate from the date funds are processed until completion of the conversion, at which time a subscriber will be issued a check for interest earned.  On your stock order form, you may not authorize direct withdrawal from a Capitol Federal Savings Bank retirement account.  If you wish to use funds in an individual or other retirement account to purchase shares of our common stock, please see “— Using Retirement Account Funds to Purchase Shares” below.  You also may not designate on your stock order form a withdrawal from Capitol Federal Savings Bank accounts with check-writing privileges.  Please provide a check instead.

 

Withdrawals from certificates of deposit to purchase shares of common stock in the offering may be made without incurring an early withdrawal penalty.  If a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate of deposit will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current statement savings rate subsequent to the withdrawal.  All funds authorized for withdrawal from deposit accounts at Capitol Federal Savings Bank must be available in the accounts at the time the stock order is received.  A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you during the offering period.  Funds will not be withdrawn from an account until the completion of the conversion and offering and will earn interest within the account at the applicable deposit account rate until that time.

 

We are not required to accept copies or facsimiles of stock order forms.  By signing the stock order form, you are acknowledging both the receipt of this prospectus and that the shares of common stock are not federally insured deposits or savings accounts or otherwise guaranteed by Capitol Federal Savings Bank, Capitol Federal Financial, Inc. or the federal or any state governments.

 

Submitting Your Order in the Subscription and Community Offerings

 

You may submit your stock order form by mail using the stock order reply envelope provided, by overnight courier to the indicated address on the stock order form, or by hand delivery to our Stock Information Center, which is located at [      ] , Topeka, Kansas [      ] .  Stock order forms may not be delivered to Capitol Federal Savings Bank offices.  Once submitted, your order is irrevocable unless the offering is terminated or extended beyond [      ] , 2010, or the number of shares of common stock to be sold is increased to more than 212,750,000 shares or decreased to fewer than 157,250,000 shares.

 

Deadline for Orders of Common Stock in the Subscription or Community Offerings

 

If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment for the shares of common stock, must be received (not postmarked) by the Stock Information Center no later than 4:00 p.m., Central Time, on [      ] , 2010.

 

 

How You Can Obtain Additional Information — Stock Information Center

 

Our banking office personnel may not, by law, assist with investment-related questions about the offering.  If you have any questions regarding the conversion or offering, please call or visit our Stock Information Center, located at [      ] , Topeka, Kansas [      ] .  The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Central Time.  The Stock Information Center will be closed weekends and bank holidays.  The Stock Information Center’s toll-free telephone number is 1-800- [      ] - [      ] .

 

 

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RISK FACTORS

 

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock.  An investment in our common stock is subject to risks inherent in our business.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this prospectus.  The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

 

Risks Related to Our Business

 

The United States economy remains weak and unemployment levels are high.  A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our business and financial results.

 

We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past two years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks and regional financial institutions such as Capitol Federal Savings Bank.  Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry, and could result in a material decrease in our interest income and/or a material increase in our loan losses.

 

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

 

We are currently one of the largest mortgage loan originators in the state of Kansas.  72.1% of our loan portfolio is comprised of loans secured by property located in Kansas, and 14.6% is comprised of loans secured by property located in Missouri.  This makes us vulnerable to a downturn in the local economy and real estate markets.  Adverse conditions in the local economy such as inflation, unemployment, recession or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income.  Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.  Currently there is not a single employer or industry in the area on which the majority of our customers are dependent.  

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

Our borrowers may not repay their loans according to the terms of the loans, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income.

 

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for loan losses” and “Business – Asset Quality – Loans and REO.

 

 

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We intend to increase our purchases of one- to four-family loans following completion of the offering.  We may not be able to purchase enough loans meeting our underwriting criteria to effectively leverage our capital.  In addition, we will need to maintain a higher allowance for loan losses on purchased loans than for one- to four-family loans we originate.

 

In order to utilize a portion of the proceeds raised in the conversion, Capitol Federal Savings Bank intends to increase the amount of one- to four-family loans purchased compared to its historical levels.  There is no guarantee that additional volumes of one- to four-family loans meeting Capitol Federal Savings Bank’s underwriting criteria will be available for purchase at acceptable prices.  If they are not available, these funds will be placed in MBS and other investment securities, which may generate a lower yield.

 

In addition, a portion of the one- to four-family loans purchased by Capitol Federal Savings Bank in past years have not performed as well as loans originated by Capitol Federal Savings Bank.  As a result, our policies currently require that we maintain a higher allowance for loan losses on loans we purchase as compared to the allowance maintained on those we originate.  Assuming we are able to generate an increased volume of purchased loans, this is expected to result in an increase in the allowance for loan losses, through a provision for loan losses, which will have an adverse effect on net income.

 

Changes in interest rates could have an adverse impact on our results of operations and financial condition.   

 

Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, mortgage backed securities and investment securities, and the interest paid on deposits and borrowings.  Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuation.  This type of risk is known as interest rate risk, and is affected by prevailing economic and competitive conditions.

 

The impact of changes in interest rates on assets is generally observed on the balance sheet and income statement in later periods than the impact of changes on liabilities due to the duration of assets versus liabilities, and also to the time lag between our commitment to originate or purchase a loan and the time we fund the loan, during which time interest rates may change.  Interest-bearing liabilities tend to reflect changes in interest rates closer to the time of market rate changes, so the difference in timing may have an adverse effect on our net interest income.

 

Changes in interest rates can also have an adverse effect on our financial condition, as our available for sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates.  We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available for sale securities, net of deferred taxes.

 

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, further exposing Capitol Federal Savings Bank to interest rate risk.  If the loan is refinanced externally, we could be unable to reinvest cash received from the resulting prepayments at rates comparable to existing loans, which subjects us to reinvestment risk.  In decreasing interest rate environments, payments received will likely be invested at the prevailing (decreased) market rate. An influx of prepayments can result in an excess of liquidity, which could impact our net interest income if profitable reinvestment opportunities are not immediately available.  Prepayment rates are based on demographics, local economic factors and seasonality, with the main factors affecting prepayment rates being prevailing interest rates and competition.   Fluctuations in interest rates also affect customer demand for deposit products.  Local competition for deposit dollars could affect our ability to attract deposits, or could result in us paying more for deposits.

 

 

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For additional information about interest rate risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.”

 

Our strategies to modify our interest rate risk profile may be difficult to implement.  

 

Our asset management strategies are designed to decrease our interest rate risk sensitivity.  One such strategy is increasing the amount of adjustable-rate and/or short-term assets.  We offer adjustable rate loan products and work with correspondent lenders to purchase adjustable rate loans as a means to achieve this strategy.  However, lower interest rates would generally create a decrease in borrower demand for adjustable-rate assets, and there is no guarantee that any adjustable-rate assets obtained will not prepay.  Conventional mortgage loans may be sold on a bulk basis for portfolio restructuring or on a flow basis as loans are originated, which also subjects us to pricing risk in the secondary market.  Additionally, we attempt to invest in shorter-term assets in the investment portfolio as a way to reduce our interest rate sensitivity.

 

We are also managing our liabilities to moderate our interest rate risk sensitivity.  Customer demand has recently been primarily for short-term maturity certificates of deposit.  Using short-term liabilities to fund long-term fixed-rate assets will generally increase the interest rate sensitivity of any financial institution.  We are using our maturing FHLB advances and repurchase agreements to mitigate the impact of the customer demand for long-term fixed-rate mortgages in our local markets by lengthening the maturities of these advances and repurchase agreements, depending on the liquidity or investment opportunities at the time we undertake additional FHLB advances or repurchase agreements.  In fiscal year 2009, we prepaid $875.0 million of FHLB advances to decrease the interest rate and extend the maturities of the advances.  FHLB advances and repurchase agreements will be entered into as liquidity is needed or to fund the purchase of assets that provide for spreads at levels acceptable to management.

 

If we are unable to originate or purchase adjustable-rate assets at favorable rates or fund loan originations or securities purchases with long-term funding, we may have difficulty executing this asset management strategy and/or it may result in a reduction in profitability.

 

 

We may have unanticipated credit risk in our investment and mortgage-backed securities portfolio.

 

At December 31, 2009, $2.53 billion, or 30.2% of our assets, consisted of investment and mortgage-backed securities, most of which were issued by, or have principal and interest payments guaranteed by FNMA or FHLMC.

 

On September 7, 2008, the Federal Housing Finance Agency placed FNMA and FHLMC into federal conservatorship.  Although the federal government has committed substantial capital to FNMA and FHLMC, there can be no assurance that these credit facilities and other capital infusions will be adequate for their needs.  If the financial support is inadequate, or if additional support is not provided when needed, these companies could continue to suffer losses and could fail to honor their guarantees and other obligations.  The U.S. Treasury Secretary has suggested that the guarantee payment structure of FNMA and FHLMC should be re-examined.  The future roles of FNMA and FHLMC could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements.  Any changes to the nature of the guarantees provided by FNMA and FHLMC could have a significant adverse affect on the market value and cash flows of the investment and mortgage-backed securities we hold, resulting in substantial losses.

 

A legislative proposal has been introduced that would eliminate the Office of Thrift Supervision, Capitol Federal Savings Bank’s and CFF’s primary federal regulator, which would require CFF to become a bank holding company.

 

Legislation has been introduced in the United States Senate and passed in the House of Representatives that would implement sweeping changes to the current bank regulatory structure.  The House Bill (H.R. 4173) would eliminate our current primary federal regulator, the Office of Thrift Supervision, by merging it into the Comptroller of the Currency (the primary federal regulator for national banks).  The proposed legislation would authorize the Comptroller of the Currency to charter mutual and stock savings banks and mutual holding companies, which would be under the supervision of the Division of Thrift Supervision of the Comptroller of the Currency.  The proposed legislation would also establish a Financial Services Oversight Council and grant the Board of Governors of the Federal Reserve System exclusive authority to regulate all bank and thrift holding companies.  As a result, CFF would become a holding company subject to supervision by the Federal Reserve Board as opposed to the Office of Thrift Supervision, and would become subject to the Federal Reserve’s regulations, including holding company capital requirements, that CFF is not currently subject to as a savings and loan holding company.  In addition, compliance with new regulations and being supervised by one or more new regulatory agencies could increase our expenses.

 

 

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Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.

 

We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.  These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed.  Because our business is highly regulated, the laws and applicable regulations are subject to frequent change.  Any change in these regulations and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations.

 

In response to the financial crisis of 2008 and early 2009, Congress has taken actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance Corporation has taken actions to increase insurance coverage on deposit accounts.  In addition, there have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.

 

The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and funding practices and liquidity standards.  Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements.  Bank regulatory agencies, such as the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors.  In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations.  New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.

 

Higher Federal Deposit Insurance Corporation insurance premiums and special assessments will adversely affect our earnings.

 

In 2009, the Federal Deposit Insurance Corporation levied a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009.  We recorded an expense of $3.8 million during the quarter ended June 30, 2009, to reflect the special assessment.  In addition, the Federal Deposit Insurance Corporation generally increased the base assessment rates effective April 1, 2009 and, therefore, our Federal Deposit Insurance Corporation insurance premium expense has increased compared to prior periods.

 

The Federal Deposit Insurance Corporation also required all insured institutions to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012.  This pre-payment was due on December 30, 2009.  The assessment rate for the fourth quarter of 2009 and for 2010 was based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 was calculated as the modified third quarter assessment rate plus an additional three basis points.  In addition, every institution’s base assessment rate for each period was calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012.  We recorded the pre-payment as a prepaid expense, which will be amortized to expense over three years based upon actual balances insured.  Our prepayment amount for calendar years 2010, 2011 and 2012 was $25.7 million.  Future increases in our assessment rate or special assessments would decrease our earnings.

 

 

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Strong competition may limit growth and profitability.  

 

While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms and savings institutions.  We must also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area.  Many of these competitors operate on a national or regional level, are a conglomerate of various financial services housed under one corporation, or otherwise have substantially greater financial or technological resources than Capitol Federal Savings Bank.  We compete primarily on the basis of the interest rates offered to depositors and the terms of loans offered to borrowers.  Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected.  Additionally, our competitors may offer products and services that we do not or cannot provide, as certain deposit and loan products fall outside of our accepted level of risk.  Our profitability depends upon our ability to compete in our local market areas.

 

Risks Related to the Offering

 

We have broad discretion to deploy our net proceeds and our failure to effectively deploy the net proceeds may have an adverse impact on our financial performance and the value of our common stock.

 

Capitol Federal Financial, Inc. intends to contribute between $757.3 million and $1.03 billion of the net proceeds of the offering to Capitol Federal Savings Bank.  Capitol Federal Financial, Inc. may use the remaining net proceeds to purchase investment securities, repurchase shares of common stock, pay dividends or for other general corporate purposes.  Capitol Federal Financial, Inc. also expects to use a portion of the net proceeds it retains to fund a loan for the purchase of shares of common stock in the offering by the employee stock ownership plan, to fund the cash contribution to the charitable foundation and to repay outstanding trust preferred securities.  Capitol Federal Savings Bank may use the net proceeds it receives to fund new loans, purchase investment securities, increase the volume of purchased loans,  acquire financial institutions or financial services companies, build new branches or acquire branches, repay debt or for other general corporate purposes.  With the exception of the loan to the employee stock ownership plan, the cash contribution to the charitable foundation and the repayment of outstanding trust preferred securities, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications.  We have not established a timetable for reinvesting the net proceeds, and we cannot predict how long reinvesting the net proceeds will require.

 

The future price of the shares of common stock may be less than the $10.00 purchase price per share in the offering.

 

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price in the offering.  In several cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price.  The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal.  The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock.  The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time.  After our shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, investor perceptions of Capitol Federal Financial, Inc. and the outlook for the financial services industry in general.  Price fluctuations may be unrelated to the operating performance of particular companies.

 

You may not revoke your decision to purchase Capitol Federal Financial, Inc.   common stock in the subscription or community offering after you send us your subscription.

 

Funds submitted or automatic withdrawals authorized in the connection with a purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date.  Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, LC., among other factors, there may be one or more delays in the completion of the conversion and offering.  Orders submitted in the subscription and community offerings are irrevocable, and subscribers will have no access to subscription funds unless the offering is terminated, or extended beyond [      ] , 2010, or the number of shares to be sold in the offering is increased to more than 212,750,000 shares or decreased to less than 157,250,000 shares.

 

 

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Our return on equity initially will be low compared to our historical performance.  A lower return on equity may negatively impact the trading price of our common stock.

 

Net income divided by average stockholders’ equity, known as return on average equity is a ratio many investors use to compare the performance of a financial institution to its peers.  Our return on average equity ratio, annualized, for the quarter ended December 31, 2009 was 8.82% compared to an average return on equity of (1.01)% based on trailing twelve-month earnings for all publicly traded fully converted savings institutions as of December 31, 2009.  Although we expect that our net income will increase following the offering, our return on average equity may decrease as a result of the additional capital that we will raise in the offering.  For example, our pro forma return on equity for the quarter ended December 31, 2009 is 3.6%, assuming the sale of shares at the maximum of the offering range.  Over time, we intend to use the net proceeds from the offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is comparable to our historical performance.  This goal may take a number of years to achieve, and we cannot assure you that we will be able to achieve it.  Consequently, you should not expect a return on equity similar to our current return on equity in the near future.  Failure to achieve a competitive return on equity may make an investment in our common stock unattractive to some investors and may cause our common stock to trade at lower prices than comparable companies with higher returns on equity.  See “Pro Forma Data” for an illustration of the financial impact of the offering.

 

The ownership interest of management and employees could enable insiders to make more difficult a merger that may provide stockholders a premium for their shares.

 

The shares of common stock that our directors and officers intend to purchase in the offering, when combined with the shares that they will receive in exchange for their existing shares of CFF common stock, are expected to result in management and the board controlling approximately 2.63% of our outstanding shares of common stock at the midpoint of the offering range.  In addition, our employee stock ownership plan is expected to purchase 4.0% of the shares of common stock sold in the stock offering and receive 2.3%   in exchange for shares currently owned by the employee stock ownership plan.  Additional stock options and shares of common stock also would be granted to our directors and employees if a stock-based incentive plan is adopted in the future.  This would result in management and employees controlling a significant percentage of our shares of common stock.  If these individuals were to act together, they could have influence over the outcome of any stockholder vote.  This voting power may discourage a potential sale of Capitol Federal Financial, Inc. that our stockholders may desire.

 

The implementation of the stock-based incentive plan may dilute your ownership interest.

 

We intend to adopt a new stock-based incentive plan following the offering, subject to receipt of stockholder approval.  This stock-based incentive plan may be funded either through open market purchases or from the issuance of authorized but unissued shares of common stock of Capitol Federal Financial, Inc.  While our intention is to fund this plan through open market purchases, stockholders would experience a 4.80% reduction in ownership interest at the maximum of the offering range in the event newly issued shares of our common stock are used to fund stock options and shares of restricted common stock under the plan in an amount equal to 5.0% and 2.0%, respectively, of the shares sold in the offering.

 

Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

 

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Additional expenses following the conversion from the compensation and benefit expenses associated with the implementation of the new stock-based incentive benefit plan will adversely affect our profitability.

 

We intend to adopt a new stock-based incentive plan after the offering, subject to stockholder approval, pursuant to which plan participants would be awarded restricted shares of our common stock (at no cost to them) and options to purchase shares of our common stock.

 

Following the offering, our non-interest expenses are likely to increase as we will recognize additional annual employee compensation and benefit expenses related to the shares granted to employees and executives under our stock-based incentive plan.  We cannot predict the actual amount of these new stock-related compensation and benefit expenses because applicable accounting practices require that expenses be based on the fair market value of the shares of common stock at specific points in the future; however, we expect them to be material.  In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts (i.e., as the loan used to acquire these shares is repaid), and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients.  The expense in the first year following the offering has been estimated to be approximately $15.8 million ($11.8 million after tax), assuming all restricted shares are awarded and all options are granted under the plan, at the maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value.  Actual expenses, however, may be higher or lower, depending on the price of our common stock.  For further discussion of our proposed stock-based plans, see “Management — Compensation Discussion and Analysis” and “Note 10 of the Notes to Consolidated Financial Statements.”

 

The contribution to the charitable foundation will adversely affect net income.

 

Subject to member and stockholder approval, we intend to provide additional funds to the Capitol Federal Foundation in connection with the conversion.  We will make a contribution to the charitable foundation in the form of $40.0 million in cash.  The contribution will have an adverse effect on our net income for the quarter and year in which we make the contribution to the charitable foundation.  The after-tax expense of the contribution will reduce net income by approximately $24.7 million.  We had net income of $21.0 million for the three months ended December 31, 2009 and $66.3 million for the year ended September 30, 2009, respectively.

 

Various factors may make takeover attempts more difficult to achieve.

 

Our Board of Directors has no current intention to sell control of Capitol Federal Financial, Inc.  Provisions of our articles of incorporation and bylaws, federal regulations, Maryland law and various other factors may make it more difficult for companies or persons to acquire control of Capitol Federal Financial, Inc. without the consent of our Board of Directors.  You may want a takeover attempt to succeed because, for example, a potential acquiror could offer a premium over the then prevailing price of our common stock.  The factors that may discourage takeover attempts or make them more difficult include:

 

●

Office of Thrift Supervision Regulations .   Office of Thrift Supervision regulations prohibit, for three years following the completion of a conversion, the direct or indirect acquisition of more than 10% of any class of equity security of a savings institution or holding company regulated by the Office of Thrift Supervision without the prior approval of the Office of Thrift Supervision.

 

●

Articles of incorporation and statutory provisions.   Provisions of the articles of incorporation and bylaws of Capitol Federal Financial, Inc. and Maryland law may make it more difficult and expensive to pursue a takeover attempt that management opposes, even if the takeover is favored by a majority of our stockholders.  These provisions also would make it more difficult to remove our current board of directors or management, or to elect new directors.  Specifically, under our articles of incorporation, any person who acquires more than 10% of the common stock of Capitol Federal Financial, Inc. without the prior approval of its board of directors would be prohibited from engaging in any type of business combination with Capitol Federal Financial, Inc.   unless such business combination was approved by a super-majority stockholder vote or met minimum price requirements.  Additional provisions include limitations on voting rights of beneficial owners of more than 10% of our common stock, the election of directors to staggered terms of three years and not permitting cumulative voting in the election of directors.  Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the board of directors.

 

 

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●

Articles of incorporation of Capitol Federal Savings Bank.   The articles of incorporation of Capitol Federal Savings Bank provide that for a period of five years from the closing of the conversion and offering, no person other than Capitol Federal Financial, Inc. may offer directly or indirectly to acquire the beneficial ownership of more than 10% of any class of equity security of Capitol Federal Savings Bank.  This provision does not apply to any tax-qualified employee benefit plan of Capitol Federal Savings Bank or Capitol Federal Financial, Inc. or to an underwriter or member of an underwriting or selling group involving the public sale or resale of securities of Capitol Federal Financial, Inc. or any of its subsidiaries, so long as after the sale or resale, no underwriter or member of the selling group is a beneficial owner, directly or indirectly, of more than 10% of any class of equity securities of Capitol Federal Savings Bank.  In addition, during this five-year period, all shares owned over the 10% limit may not be voted on any matter submitted to stockholders for a vote.

 

●

Issuance of stock options and restricted stock .   We also intend to issue stock options and shares of restricted stock to key employees and directors that will require payments to these persons in the event of a change in control of Capitol Federal Financial, Inc.  These payments may have the effect of increasing the costs of acquiring Capitol Federal Financial, Inc., thereby discouraging future takeover attempts.

 

●

Change of control severance agreements .   Capitol Federal Financial, Inc. has change of control severance agreements with executive officers which will remain in effect following the stock offering.  These agreements may have the effect of increasing the costs of acquiring Capitol Federal Financial, Inc., thereby discouraging future takeover attempts.

 

There may be a decrease in stockholders’ rights for existing stockholders of CFF.

 

As a result of the conversion, existing stockholders of CFF will become stockholders of Capitol Federal Financial, Inc.  Some rights of stockholders of Capitol Federal Financial, Inc. will be reduced compared to the rights stockholders currently have in CFF.  The reduction in stockholder rights results from differences between the federal and Maryland charters and bylaws, and from distinctions between federal and Maryland law.  Many of the differences in stockholder rights under the articles of incorporation and bylaws of Capitol Federal Financial, Inc. are not mandated by Maryland law but have been chosen by management as being in the best interests of Capitol Federal Financial, Inc. and its stockholders.  The articles of incorporation and bylaws of Capitol Federal Financial, Inc. include the following provisions: (i) approval by at least a majority of outstanding shares required to remove a director for cause; (ii) greater lead time required for stockholders to submit proposals for new business or to nominate directors; and (iii) approval by at least 80% of outstanding shares of capital stock entitled to vote generally is required to amend the bylaws and certain provisions of the articles of incorporation.  See “Comparison of Stockholders’ Rights For Existing Stockholders of CFF” for a discussion of these differences.

 

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF

CFF AND SUBSIDIARY

 

The summary financial information presented below is derived in part from the consolidated financial statements of CFF and its subsidiary.  The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes beginning on page F-1.  The information at December 31, 2009 and 2008 and for the years ended September 30, 2009, 2008 and 2007 is derived in part from the audited consolidated financial statements of CFF that appear in this prospectus.  The information at September 30, 2007, 2006 and 2005, and for the years ended September 30, 2006 and 2005, is derived in part from audited consolidated financial statements that do not appear in this prospectus.  The following information is only a summary and you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto contained elsewhere in this prospectus.

 

(footnotes begin on next page)

 

		At December 31,				At Year Ended September 30,
		2009				2009				2008				2007				2006				2005
		(Dollars and share counts in thousands, except per share amounts)
Selected Balance Sheet Data:
Total assets		$	8,374,762			$	8,403,680			$	8,055,249			$	7,675,886			$	8,199,073			$	8,409,687
Loans receivable, net			5,423,923				5,603,965				5,320,780				5,290,071				5,221,117				5,464,130
Investment securities:
Available-for-sale (AFS)			234,001				234,784				49,586				102,424				189,480				—
Held-to-maturity (HTM)			417,942				245,920				92,773				421,744				240,000				430,499
Mortgage-backed securities (MBS):
Trading			—				—				—				—				396,904				—
AFS			1,305,096				1,389,211				1,484,055				402,686				556,248				737,638
HTM			572,873				603,256				750,284				1,011,585				1,131,634				1,407,616
Capital stock of Federal Home Loan Bank (FHLB)			134,064				133,064				124,406				139,661				165,130				182,259
Deposits			4,227,252				4,228,609				3,923,883				3,922,782				3,900,431				3,960,297
Advances from FHLB			2,394,214				2,392,570				2,447,129				2,732,183				3,268,705				3,426,465
Other borrowings			713,609				713,609				713,581				53,524				53,467				53,410
Stockholders’ equity			941,999				941,298				871,216				867,631				863,219				865,063
Book value per share			12.86				12.85				11.93				11.88				11.89				11.91

 

		Three Months Ended   December 31,								Year Ended September 30,
		2009				2008				2009				2008				2007				2006				2005
		(Dollars and share counts in thousands, except per share amounts)
Selected Operations Data:
Total interest and dividend income		$	98,887			$	105,273			$	412,786			$	410,806			$	411,550			$	410,928			$	400,107
Total interest expense			54,033				64,055				236,144				276,638				305,110				283,905				244,201
Net interest and dividend income			44,854				41,218				176,642				134,168				106,440				127,023				155,906
Provision (recovery) for loan losses			3,115				549				6,391				2,051				(225	)			247				215
Net interest and dividend income after provision (recovery) for loan losses			41,739				40,669				170,251				132,117				106,665				126,776				155,691
Retail fees and charges			4,723				4,530				18,023				17,805				16,120				17,007				16,029
Other income			505				644				10,571				12,222				7,846				7,788				7,286
Total other income			13,131				6,642				28,594				30,027				23,966				24,795				23,315
Total other expenses			22,749				22,187				93,621				81,989				77,725				72,868				73,631
Income before income tax expense			32,121				25,124				105,224				80,155				52,906				78,703				105,375
Income tax expense			11,141				9,272				38,926				29,201				20,610				30,586				40,316
Net income			20,980				15,852				66,298				50,954				32,296				48,117				65,059
Basic earnings per share		$	0.29			$	0.22			$	0.91			$	0.70			$	0.44			$	0.66			$	0.90
Average shares outstanding			73,267				73,063				73,144				72,939				72,849				72,595				72,506
Diluted earnings per share		$	0.29			$	0.22			$	0.91			$	0.70			$	0.44			$	0.66			$	0.89
Average diluted shares outstanding			73,278				73,162				73,208				73,013				72,970				72,854				73,082

 

 

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		At or For the Three Months Ended December 31,				At and for Year Ended September 30,
		2009				2009				2008				2007				2006				2005
Selected Performance and Financial Ratios and Other Data:
Performance Ratios:
Return on average assets			1.00	%			0.81	%			0.65	%			0.41	%			0.58	%			0.77	%
Return on average equity			8.82				7.27				5.86				3.72				5.58				7.62
Dividends paid per public share  (1)		$	0.79			$	2.11			$	2.00			$	2.09			$	2.30			$	2.00
Dividend payout ratio			79.46				66.47	%			81.30	%			133.14	%			97.41	%			62.59	%
Ratio of operating expense to average total assets			1.08				1.14				1.04				0.98				0.88				0.87
Efficiency ratio (2)			39.23				45.62				49.93				59.60				48.03				41.19
Ratio of average interest-earning assets   to average interest-bearing liabilities			1.12	x			1.12	x			1.12	x			1.12	x			1.11	x			1.10	x
Interest rate spread information:
Average during period			1.91	%			1.86	%			1.35	%			0.93	%			1.19	%			1.59	%
End of period			1.91				1.89				1.70				0.89				1.07				1.46
Net interest margin			2.19				2.20				1.75				1.36				1.57				1.87
Asset Quality Ratios:
Non-performing assets to total assets			0.47				0.46				0.23				0.12				0.10				0.08
Non-performing loans to total loans			0.60				0.55				0.26				0.14				0.11				0.09
Allowance for loan losses to non-performing loans			37.59				32.83				42.37				56.87				79.03				89.14
Allowance for loan losses to loans receivable, net			0.23				0.18				0.11				0.08				0.08				0.08
Ratio of net charge-offs during the period to average loans outstanding			0.02	%			0.04	%			*				*				*				*
Capital Ratios:
Equity to total assets at end of period (3)			11.25				11.20				10.82				11.30				10.53				10.29
Average equity to average assets			11.33				11.08				11.05				10.91				10.47				10.05
Regulatory Capital Ratios of Bank:
Tangible equity			10.1				10.0				10.0				10.3				9.5				9.1
Tier 1 (core) capital			10.1				10.0				10.0				10.3				9.5				9.1
Tier 1 (core) risk-based capital			23.8				23.2				23.1				22.9				22.6				21.3
Total risk-based capital			24.0				23.3				23.0				22.8				22.5				21.3
Other Data:
Number of traditional offices			34				33				30				29				29				29
Number of in-store offices			10				9				9				9				9				8

 

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(1)

For all periods shown, Capitol Federal Savings Bank MHC, which owns a majority of the outstanding shares of Capitol Federal Financial common stock, waived its right to receive dividends paid on the common stock with the exception of the $0.50 per share dividend paid on 500,000 shares in February 2005.  Public shares exclude shares held by Capitol Federal Savings Bank MHC, as well as unallocated shares held in the employee stock ownership plan.

(2)	Non-interest expense divided by net interest and dividend income plus non-interest income.

(3)	CFF has no intangible assets.

 

*	Less than 0.01%

 

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward looking statements 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;
	●	our ability to continue to originate a significant volume of one- to four-family mortgage loans in our market area;
	●	our ability to acquire funds from or invest funds in wholesale or secondary markets;
	●	the future earnings and capital levels of Capitol Federal Savings Bank, which could affect the ability of Capitol Federal Financial, Inc. to pay dividends in accordance with its dividend policies;
	●	fluctuations in deposit flows, loan demand, and/or real estate values, which may adversely affect our business;
	●	the credit risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
	●	results of examinations of Capitol Federal Savings Bank by its primary regulator, the Office of Thrift Supervision, including the possibility that the Office of Thrift Supervision may, among other things, require Capitol Federal Savings Bank to increase its allowance for loan losses;
	●	the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;
	●	the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
	●	the effects of, and changes in, foreign and military policies of the United States government;
	●	inflation, interest rate, market and monetary fluctuations;
	●	our ability to access cost-effective funding;
	●	the timely development of and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;
	●	the willingness of users to substitute competitors’ products and services for our products and services;

 

 

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	●	our success in gaining regulatory approval of our products and services and branching locations, when required;
	●	the impact of changes in financial services laws and regulations, including laws concerning taxes, banking securities and insurance and the impact of other governmental initiatives affecting the financial services industry;
	●	implementing business initiatives may be more difficult or expensive than anticipated;
	●	technological changes;
	●	acquisitions and dispositions;
	●	changes in consumer spending and saving habits; and
	●	our success at managing the risks involved in our business.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  Please see “Risk Factors” beginning on page [      ] .

 

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the aggregate net proceeds will be between $1.51 billion and $2.05 billion.

 

We intend to distribute the net proceeds from the stock offering as follows:

		Based Upon the Sale at $10.00 Per Share of
		157,250,000 Shares								185,000,000 Shares								212,750,000 Shares
		Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds
		(Dollars in Thousands)
Offering proceeds		$	1,572,500							$	1,850,000							$	2,127,500
Less offering expenses			57,836								67,119								76,401
Net offering proceeds		$	1,514,664				100.0	%		$	1,782,881				100.0	%		$	2,051,099				100.0	%
Distribution of net proceeds:
To Capitol Federal Savings Bank		$	757,332				50.0	%		$	891,441				50.0	%		$	1,025,549				50.0	%
To fund the loan to employee  stock ownership plan			62,900				4.2				74,000				4.2				85,100				4.1
To repay outstanding trust preferred  securities			53,609				3.5				53,609				3.0				53,609				2.6
Cash contributed to foundation			40,000				2.6				40,000				2.2				40,000				2.0
Retained by Capitol Federal Financial, Inc.		$	600,823				39.7	%		$	723,831				40.6	%		$	846,841				41.3	%

 

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Capitol Federal Savings Bank’s deposits.  The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates.  For example, our expenses would increase if a larger percentage of shares than we have assumed are sold in the syndicated community offering rather than in the subscription and community offerings.

 

 

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Capitol Federal Financial, Inc. May Use the Proceeds it Retains From the Offering:

 

	●	to fund a loan to the employee stock ownership plan to purchase shares of common stock in the offering;
	●	to repay the outstanding trust preferred securities;
	●	to pay cash dividends to stockholders;
	●	to repurchase shares of our common stock for, among other things, the funding of our stock-based incentive plan;
	●	to invest in securities;
	●	to finance, where opportunities are presented, the acquisition of financial institutions or other financial service companies primarily in, or adjacent to, our market areas, although we do not currently have any understandings or agreements regarding any specific acquisition transaction; and
	●	for other general corporate purposes.

 

Capitol Federal Financial, Inc. intends to make a $40.0   million cash contribution to fund the Capitol Federal Foundation and repay outstanding trust preferred securities totaling $53.6 million.  Initially, a substantial portion of the net proceeds will be invested in short-term investments and government agency backed mortgage-backed securities, as well as investment-grade debt obligations.

 

Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except to fund certain stock-based plans or, with prior regulatory approval, when extraordinary circumstances exist.

 

Capitol Federal Savings Bank May Use the Net Proceeds it Receives From the Offering:

 

	●	to increase our emphasis on loan purchases, subject to underwriting standards and availability;
	●	to support internal growth through lending in the communities we serve;
	●	to enhance existing products and services and support the development of new products and services by investing, for example, in technology to support growth and enhanced customer service;
	●	to invest in securities;
	●	to finance the acquisition of branches from other financial institutions or build or lease new branch facilities primarily in, or adjacent to, the State of Kansas although we do not currently have any agreements or understandings regarding any specific acquisition transaction; and
	●	for other general corporate purposes.

 

Initially, a substantial portion of the net proceeds will be invested in short-term investments and government agency backed mortgage-backed securities, as well as investment-grade debt obligations.  The use of proceeds may change based on changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of potential acquisitions and overall market conditions.  Our business strategy for the deployment of the net proceeds raised in the offering is discussed in more detail in “Summary — Reasons for the Conversion and the Offering.”

 

 

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Our return on equity may be relatively low unless and until we are able to effectively reinvest the additional capital raised in the offering.  Until we can increase our non-interest income, our return on equity may be below the industry average, which may negatively affect the value of our common stock.  See “Risk Factors — Our return on equity will initially be low compared to our historical performance.  A lower return on equity may negatively impact the trading price of our common stock.”

 

OUR POLICY REGARDING DIVIDENDS

 

As of December 31, 2009, CFF paid a quarterly cash dividend of $0.50 per share, which equals $2.00 per share on an annualized basis.  In addition, we generally declare and pay a year end cash dividend if we have sufficient earnings as determined by our board of directors. After the conversion, we intend to continue to pay cash dividends on a quarterly basis, although at a reduced level, the amount of which will be determined following completion of the conversion.  The dividend rate and the continued payment of dividends also will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions.  No assurance can be given that we will continue to pay dividends or that they will not be reduced or eliminated in the future.

 

Under the rules of the Office of Thrift Supervision, Capitol Federal Savings Bank will not be permitted to pay dividends on its capital stock to Capitol Federal Financial, Inc., its sole stockholder, if Capitol Federal Savings Bank’s stockholder’s equity would be reduced below the amount of the liquidation account established in connection with the conversion.  In addition, Capitol Federal Savings Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized.  See “The Conversion and Offering — Liquidation Rights.”

 

Capitol Federal Financial, Inc.’s ability to pay dividends will depend on net proceeds of the offering retained by us and earnings thereon, as well as dividends from Capitol Federal Savings Bank.  Our payment of dividends will also be subject to state law limitations and the liquidation account established in connection with the conversion.  Maryland law generally limits dividends to an amount equal to the excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and to an amount that would not make us insolvent.

 

Finally, pursuant to Office of Thrift Supervision regulations, during the three-year period following the conversion, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

See “Selected Consolidated Financial and Other Data of CFF and Subsidiary” and “Market for the Common Stock” for information regarding our historical dividend payments.

 

MARKET FOR THE COMMON STOCK

 

CFF’s common stock currently trades on the Nasdaq Global Select Market under the symbol CFFN.  Upon completion of the offering, the shares of common stock of Capitol Federal Financial, Inc. will replace CFF’s shares of common stock.  We expect that Capitol Federal Financial, Inc.’s shares of common stock will trade on the Nasdaq Global Select Market under the trading symbol CFFND for a period of 20 trading days following the completion of the offering.  Thereafter, the trading symbol will revert to CFFN.  In order to list our common stock on the Nasdaq Global Select Market, we are required to have at least three broker-dealers who will make a market in our common stock.  CFF currently has 21 registered market makers.

 

The following table sets forth the high and low trading prices for shares of CFF common stock and cash dividends paid per share for the periods indicated.  As of December 31, 2009, there were 21,024,204 shares of CFF common stock issued and outstanding (excluding shares held by Capitol Federal Savings Bank MHC).

 

 

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Year Ending September 30, 2010		High				Low				Dividend Paid Per Share
Third quarter (through _____, 2010)		$	[       ]			$	[       ]			$	[       ]
Second quarter			38.20				30.76				.50
First quarter			33.36				28.19				.79
Year Ending September 30, 2009		High				Low				Dividend Paid Per Share
Fourth quarter		$	39.29			$	30.24			$	.50
Third quarter			44.93				34.91				.50
Second quarter			45.77				33.02				.50
First quarter			47.64				33.06				.61

 

Year Ending September 30, 2008		High				Low				Dividend Paid Per Share
Fourth quarter		$	51.56			$	36.06			$	.50
Third quarter			41.45				36.82				.50
Second quarter			38.60				27.63				.50
First quarter			36.09				30.47				.50

 

On May 5,   2010, the business day immediately preceding the public announcement of the conversion, the closing price of CFF common stock as reported on the Nasdaq Global Select Market was $ [      ] per share.  At [      ]   2010, the closing price of CFF’s common stock was $ [      ] , and there were approximately 9,395   stockholders of record.

 

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At December 31, 2009, Capitol Federal Savings Bank exceeded all of the applicable regulatory capital requirements.  The table below sets forth the historical equity capital and regulatory capital of Capitol Federal Savings Bank at December 31, 2009, and the pro forma regulatory capital of Capitol Federal Savings Bank, after giving effect to the sale of Capitol Federal Financial, Inc.’s shares of common stock at a $10.00 per share purchase price.  Accordingly, the table assumes the receipt by Capitol Federal Savings Bank of 50% of the net proceeds.  See “How We Intend to Use the Proceeds from the Offering.”

		Capitol Federal Savings Bank Historical at								Pro Forma at December 31, 2009 Based Upon the Sale at $10.00 Per Share
		December 31, 2009								157,250,000 Shares								185,000,000 Shares								212,750,000 Shares
		Amount				Percent of Assets (1)				Amount				Percent of Assets (1)				Amount				Percent of Assets (1)				Amount				Percent of Assets (1)
		(Dollars in Thousands)
Equity capital		$	876,290				10.44	%		$	1,539,272				16.82	%		$	1,656,731				17.85	%		$	1,774,189				18.84	%
Core (leverage) capital (2)		$	844,959				10.13	%		$	1,507,941				16.57	%		$	1,625,400				17.60	%		$	1,742,858				18.60	%
Core (leverage) requirement			417,109				5.00				454,975				5.00				461,681				5.00				468,386				5.00
Excess		$	427,850				5.13	%		$	1,052,966				11.57	%		$	1,163,719				12.60	%		$	1,274,472				13.60	%
Tier I risk-based capital (2)(3)		$	844,959				23.79	%		$	1,507,941				40.72	%		$	1,625,400				43.57	%		$	1,742,858				46.39	%
Tier I requirement			213,118				6.00				222,206				6.00				223,815				6.00				225,424				6.00
Excess		$	631,841				17.79	%		$	1,285,735				34.72	%		$	1,401,585				37.57	%		$	1,517,434				40.39	%
Total risk-based capital (2)(3)		$	853,139				24.02	%		$	1,516,121				40.94	%		$	1,633,580				43.79	%		$	1,751,038				46.61	%
Risk-based requirement			355,196				10.00				370,343				10.00				373,025				10.00				375,707				10.00
Excess		$	497,943				14.02	%		$	1,145,778				30.94	%		$	1,260,555				33.79	%		$	1,375,331				36.61	%
Reconciliation of capital infused into Capitol Federal Savings Bank:
Net proceeds										$	757,332							$	891,441							$	1,025,549
Less:
Common stock acquired by employee stock ownership plan											(62,900	)							(74,000	)							(85,100	)
Common stock acquired by stock-based incentive plan											(31,450	)							(37,000	)							(42,550	)
Pro forma increase in GAAP and regulatory capital (3)										$	662,982							$	780,441							$	897,899

 

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(1)

Core capital levels are shown as a percentage of total adjusted assets.  Risk-based capital levels are shown as a percentage of risk-weighted assets.  Capital requirements of 4.0%, 5.0% and 10% for core (leverage), Tier I risk-based and Total risk-based capital reflect “well capitalized” status under prompt corrective action provisions.

(2)

Pro forma capital levels assume that we fund the stock-based incentive plans with purchases in the open market equal to 2.0%   of the shares of common stock sold in the stock offering at a price equal to the price for which the shares of common stock are sold in the stock offering, and that the employee stock ownership plan purchases 4.0% of the shares of common stock sold in the stock offering with funds we lend.  Pro forma GAAP and regulatory capital have been reduced by the amount required to fund both of these plans.  See “Management” for a discussion of the stock-based benefit plan and employee stock ownership plan.

(3)	Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

 

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CAPITALIZATION

 

The following table presents the historical consolidated capitalization of CFF at December 31, 2009 and the pro forma consolidated capitalization of Capitol Federal Financial, Inc. after giving effect to the offering, based upon the assumptions set forth in the “Pro Forma Data” section.

 

		CFF				Capitol Federal Financial, Inc. $10.00 Per Share Pro Forma Based on the Sale of
		Historical at December 31, 2009				157,250,000 Shares				185,000,000 Shares				212,750,000 Shares
		(Dollars in Thousands)
Deposits (1)		$	4,227,252			$	4,227,197			$	4,227,197			$	4,227,197
Borrowed funds			3,054,214				3,054,214				3,054,214				3,054,214
Trust preferred securities			53,609				—				—				—
Total deposits and borrowed funds		$	7,335,075			$	7,281,411			$	7,281,411			$	7,281,411
Stockholders’ equity:
Preferred stock, $0.01 par value,  100,000,000 shares authorized  (post-conversion) (2)		$	—			$	—			$	—			$	—
Common stock $0.01 par value,  1,400,000,000 shares authorized  (post-conversion); shares to be issued as reflected (2)(3)			915				2,230				2,624				3,017
Paid-in capital (2)			453,975				1,967,324				2,235,147				2,502,972
Retained earnings (4)			785,914				785,914				785,914				785,914
Accumulated other  comprehensive income			30,875				30,875				30,875				30,875
Plus:
Capitol Federal Savings Bank MHC capital  contribution			—				133				133				133
Less:
Treasury stock, at cost			(321,859	)			(321,859	)			(321,859	)			(321,859	)
After-tax expense of contribution to  charitable foundation (5)			—				(24,672	)			(24,672	)			(24,672	)
Common stock acquired by  employee stock ownership plan (6)			(7,561	)			(70,461	)			(81,561	)			(92,661	)
Common stock acquired  by the stock-based incentive plan (7)			(260	)			(31,710	)			(37,260	)			(42,810	)
Total stockholders’ equity		$	941,999			$	2,337,774			$	2,589,341			$	2,840,909
Shares outstanding:
Total shares outstanding			74,023,577				223,023,170				262,380,200				301,737,230
Exchange shares issued			—				65,773,170				77,380,200				88,987,230
Shares offered for sale			—				157,250,000				185,000,000				212,750,000
Total stockholders’ equity as a     percentage of total assets			11.25	%			24.06	%			25.98	%			27.80	%

 

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(1)

Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the offering other than a deposit of $55 thousand of Capitol Federal Savings Bank MHC held at Capitol Federal Savings Bank.  These withdrawals would reduce pro forma deposits by the amount of the withdrawals.  On a pro forma basis, it also reflects a transfer to equity of $113 thousand   from Capitol Federal Savings Bank MHC consisting of the deposits held at Capitol Federal Savings Bank and tax benefits held by Capitol Federal Savings Bank MHC.

(2)

CFF currently has 50,000,000 authorized shares of preferred stock and 450,000,000 authorized shares of common stock, par value $0.01 per share.  On a pro forma basis, Capitol Federal Financial, Inc. common stock and additional paid-in capital have been revised to reflect the number of shares of Capitol Federal Financial, Inc. common stock to be outstanding, which is 223,023,170 shares, 262,380,200 shares and 301,737,230 shares at the minimum, midpoint and maximum of the offering range, respectively.

(3)

No effect has been given to the issuance of additional shares of Capitol Federal Financial, Inc. common stock pursuant to stock options to be granted under a stock-based incentive plan.  An amount up to 5.0% of the shares of Capitol Federal Financial, Inc. common stock sold in the offering may be reserved for issuance upon the exercise of options.  No effect has been given to the exercise of options currently outstanding.  See “Management - Benefits to be Considered Following Completion of the Conversion.”

(4)	The retained earnings of Capitol Federal Savings Bank will be substantially restricted after the conversion.  See “The Conversion and Offering - Liquidation Rights” and “Supervision and Regulation.”

(5)

Represents the expense of the contribution to the charitable foundation based on a 38.32% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable foundations equal to 10% of our annual taxable income, subject to our ability to carry forward for federal or state purposes any unused portion of the deduction for the five years following the year in which the contribution is made.

 

 

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