Capitol Federal® Financial, Inc. Reports Second Quarter Fiscal Year 2017 Results

TOPEKA, Kan., April 27, 2017 /PRNewswire/ -- Capitol Federal Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the quarter ended March 31, 2017.  Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 10, 2017 and posted on our website, http://ir.capfed.com.  For best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:

• net income of $21.6 million;
• basic and diluted earnings per share of $0.16;
• annualized loan portfolio growth of 7%;
• annualized deposit portfolio growth of 6%;
• net interest margin of 1.80% (2.15% excluding the effects of the leverage strategy); and
• dividends paid of $11.4 million, or $0.085 per share.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and December 31, 2016

For the quarter ended March 31, 2017, the Company recognized net income of $21.6 million, or $0.16 per share, compared to net income of $20.6 million, or $0.15 per share, for the quarter ended December 31, 2016.  The increase was due primarily to an increase in net interest income.

Net interest income increased $1.7 million, or 3.7%, from the prior quarter to $49.1 million for the current quarter.  The net interest margin increased seven basis points from 1.73% for the prior quarter to 1.80% for the current quarter.  Excluding the effects of the leverage strategy, the net interest margin would have increased eight basis points from 2.07% for the prior quarter to 2.15% for the current quarter.  The increase in the net interest margin was due mainly to the shift in the mix of interest-earning assets from relatively lower yielding securities and cash to higher yielding loans, along with a reduction in interest expense resulting from fewer days in the current quarter and an increase in yield on mortgage-backed securities ("MBS").

Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter increased nine basis points from the prior quarter, to 2.85%, while the average balance of interest-earning assets decreased $26.1 million between the two periods.  Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased seven basis points from the prior quarter, to 3.27%, while the average balance would have decreased $47.4 million.  The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

The increase in interest income on loans receivable was due primarily to a $125.3 million increase in the average balance of the portfolio.  The loan growth was funded with cash flows from the securities portfolio and excess operating cash during the quarter.  The weighted average yield on the portfolio increased one basis point, to 3.54% for the current quarter.

The decrease in interest income on MBS was due mainly to a $76.1 million decrease in the average balance of the portfolio as cash flows were used to fund loan growth.  This was partially offset by an increase in the weighted average yield on the portfolio of eight basis points, to 2.20% for the current quarter due primarily to a decrease in the impact of net premium amortization.  During the current quarter, $1.0 million of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 36 basis points.  During the prior quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 43 basis points.  As of March 31, 2017, the remaining net balance of premiums on our portfolio of MBS was $10.9 million.

The increase in interest income on cash and cash equivalents was due primarily to a 25 basis point increase in the weighted average yield, to 0.79% for the current quarter, resulting from an increase in the yield earned on balances held at the Federal Reserve Bank of Kansas City (the "Federal Reserve Bank").

Interest Expense
The weighted average rate paid on total interest-bearing liabilities for the current quarter increased four basis points from the prior quarter, to 1.19%, and the average balance of interest-bearing liabilities increased $15.3 million between the two periods.  Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities for the current quarter would have increased one basis point from the prior quarter, to 1.31%, while the average balance would have decreased $6.0 million.  The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. 

FHLB borrowings in the table above includes interest expense on long-term FHLB advances and interest expense on FHLB borrowings associated with the leverage strategy.  Interest expense related to long-term FHLB advances decreased $343 thousand from the prior quarter due to a $47.5 million decrease in the average balance of the portfolio.  The weighted average rate paid during the current quarter was 2.30%.  During the prior quarter, a $100.0 million advance with an effective rate of 0.78%, which was lower than the existing portfolio rate, matured and was not renewed or replaced, thereby increasing the weighted average rate paid on the portfolio.  Interest expense on FHLB borrowings associated with the leverage strategy increased $997 thousand from the prior quarter due to a 20 basis point increase in the weighted average rate paid as a result of an increase in interest rates between periods.

Provision for Credit Losses
Capitol Federal Savings Bank (the "Bank") did not record a provision for credit losses during the current quarter or the prior quarter.  Based on management's assessment of the allowance for credit losses ("ACL") formula analysis model and several other factors, it was determined that no provision for credit losses was necessary.  Net loan charge-offs were $74 thousand during the current quarter compared to $19 thousand in the prior quarter.  At March 31, 2017, loans 30 to 89 days delinquent were 0.22% of total loans and loans 90 or more days delinquent or in foreclosure were 0.19% of total loans. 

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

The increase in other non-interest income was due primarily to an increase in insurance commissions resulting from the receipt of annual commissions from certain insurance providers during the current quarter and no such commissions being received in the prior quarter.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

The increase in advertising and promotional expense was due mainly to the timing of media campaigns and sponsorships.

The Company's efficiency ratio was 40.16% for the current quarter compared to 41.08% for the prior quarter.  The change in the efficiency ratio was due primarily to an increase in net interest income in the current quarter.  The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.  A lower value indicates that the financial institution is generating revenue with a proportionally lower level of expense.

Income Tax Expense
Income tax expense was $11.1 million for the current quarter, compared to $10.4 million for the prior quarter.  The effective tax rate for the current quarter was 34.0% compared to 33.6% for the prior quarter.  Management anticipates the effective tax rate for fiscal year 2017 will be approximately 34%, based on fiscal year 2017 estimates as of March 31, 2017.

Comparison of Operating Results for the Six Months Ended March 31, 2017 and 2016

The Company recognized net income of $42.2 million, or $0.31 per share, for the six month period ended March 31, 2017, a decrease of $80 thousand, or 0.2%, from the six month period ended March 31, 2016.  Net income attributable to the leverage strategy was $1.5 million during the current year six month period, compared to $1.1 million for the prior year six month period.  The Company's efficiency ratio was 40.61% for the current year six month period compared to 43.25% for the prior year six month period.  The change in the efficiency ratio was due primarily to a decrease in non-interest expense.

The net interest margin increased one basis point, from 1.76% for the prior year six month period to 1.77% for the current year six month period.  Excluding the effects of the leverage strategy, the net interest margin would have decreased one basis point, from 2.12% for the prior year six month period to 2.11% for the current year six month period.  The decrease in the net interest margin was due mainly to an increase in interest expense on deposits, partially offset by a decrease in interest expense on borrowings not related to the leverage strategy.  The positive impact on the net interest margin due to the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans was offset by a decrease in the yield on loans and MBS.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased six basis points, from 2.74% for the prior year six month period to 2.80% for the current year six month period, while the average balance of interest-earning assets decreased $43.4 million from the prior year six month period.  Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased one basis point, from 3.22% for the prior year six month period to 3.23% for the current year six month period, while the average balance would have decreased $20.0 million.  The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent. 

The increase in interest income on loans receivable was due to a $392.9 million increase in the average balance of the portfolio, partially offset by a nine basis point decrease in the weighted average yield on the portfolio, to 3.53% for the current year six month period.  Loan growth was primarily funded through cash flows from the securities portfolio.  The decrease in the weighted average yield was due primarily to endorsements and refinances repricing loans to lower market rates, an increase in the amortization of premiums related to correspondent loans, and the origination and purchase of loans between periods at rates less than the existing portfolio rate.

The decrease in interest income on the MBS portfolio was due primarily to a $231.1 million decrease in the average balance of the portfolio as cash flows not reinvested were used to fund loan growth.  Additionally, the weighted average yield on the MBS portfolio decreased seven basis points, from 2.23% during the prior year six month period to 2.16% for the current year six month period.  The decrease in the weighted average yield was due to an increase in the impact of net premium amortization.  Net premium amortization of $2.3 million during the current year six month period decreased the weighted average yield on the portfolio by 40 basis points.  During the prior year six month period, $2.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 33 basis points. 

The increase in interest income on cash and cash equivalents was due to a 27 basis point increase in the weighted average yield resulting from an increase in the yield earned on balances held at the Federal Reserve Bank.

The decrease in interest income on investment securities was due to a $140.6 million decrease in the average balance.  Cash flows not reinvested in the portfolio were used to fund loan growth.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased seven basis points, from 1.10% for the prior year six month period to 1.17% for the current year six month period, while the average balance of interest-bearing liabilities decreased $19.5 million from the prior year six month period.  Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased two basis points, from 1.28% for the prior year six month period to 1.30% for the current year six month period, and the average balance of interest-bearing liabilities would have increased $3.9 million.  The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

FHLB borrowings in the table above include interest expense on long-term FHLB advances and interest expense on FHLB borrowings associated with the leverage strategy.  Interest expense on long-term FHLB advances decreased $1.9 million from the prior year six month period due to a $208.1 million decrease in the average balance of the portfolio as a result of not replacing all of the advances that matured between periods.  Funds generated from deposit growth were used to pay off the maturing advances.  The weighted average rate paid on long-term FHLB advances increased four basis points, to 2.28% for the current year six month period, due to maturing advances having a lower rate than the overall advance portfolio rate.  Interest expense on FHLB borrowings associated with the leverage strategy increased $2.3 million from the prior year six month period due to a 23 basis point increase in the weighted average rate paid as a result of an increase in interest rates between periods.

The increase in interest expense on deposits was due primarily to a seven basis point increase in the weighted average rate, to 0.80% for the current year six month period, along with growth in the portfolio.  The increase in weighted average rate was primarily related to the retail certificate of deposit portfolio.  The average balance of the deposit portfolio increased $212.1 million during the current year six month period, with the majority of the increase in the retail deposit portfolio.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

The decrease in income from BOLI was due mainly to the receipt of a death benefit during the prior year six month period and no such benefit in the current year six month period.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

The increase in information technology and communications was due largely to software licensing and communication network expenses.  The decrease in federal insurance premiums was due primarily to a decrease in the Federal Deposit Insurance Corporation base assessment rate effective July 1, 2016.  The decrease in office supplies and related expense was due primarily to lower debit card expenses compared to the prior year six month period, during which time the Bank began issuing debit cards enabled with chip card technology.  The decrease in low income housing partnerships expense was due to a change in the Bank's method of accounting for those investments.  The Bank had been accounting for these partnerships using the equity method of accounting as two of the Bank's officers were involved in the operational management of the low income housing partnership investment group. Effective September 30, 2016, those two Bank officers discontinued their involvement in the operational management of the investment group.  On October 1, 2016, the Bank began using the proportional method of accounting for those investments rather than the equity method.  As a result, the Bank no longer reports low income housing partnership expenses in non-interest expense; rather, the pretax operating losses and related tax benefits from the investments are reported as a component of income tax expense.  The decrease in other non-interest expense was due mainly to lower deposit account charge-offs related to debit card fraud in the current year six month period, along with a decrease in other real estate owned ("OREO") operations expense.

Income Tax Expense
Income tax expense was $21.5 million for the current year six month period compared to $19.5 million for the prior year six month period.  The effective tax rate for the current year six month period was 33.8% compared to 31.5% for the prior year six month period.  The increase in effective tax rate was due mainly to the change in accounting method for low income housing partnerships as previously discussed.

Financial Condition as of March 31, 2017 

Total assets were $9.25 billion at March 31, 2017 compared to $9.27 billion at September 30, 2016.  The $20.9 million decrease was due primarily to a $209.0 million decrease in the securities portfolio and a $41.2 million decrease in cash and cash equivalents, partially offset by an increase in the loan portfolio.

The loans receivable portfolio, net, increased $235.7 million to $7.19 billion at March 31, 2017, from $6.96 billion at September 30, 2016.  This growth was primarily funded with cash flows from the securities portfolio.  During the current year six month period, the Bank originated and refinanced $375.1 million of loans with a weighted average rate of 3.47% and purchased $351.7 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.45%.  The Bank also entered into participations of $32.3 million of commercial real estate loans with a weighted average rate of 3.96%, of which $22.2 million had not yet been funded as of March 31, 2017.

The Bank continued to utilize a leverage strategy to increase earnings.  The leverage strategy during the current quarter involved borrowing up to $2.10 billion from FHLB by entering into short-term FHLB advances.  The borrowings were repaid prior to quarter end for regulatory purposes.  The proceeds from the borrowings, net of the required FHLB stock holdings, which yielded approximately 6.5% during the current quarter, were deposited at the Federal Reserve Bank.  Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, net of the interest rate spread between the yield on the cash at the Federal Reserve Bank and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes.  Net income attributable to the leverage strategy was $828 thousand during the current quarter, compared to $642 thousand for the prior quarter.  The increase was due to a more positive interest rate spread between the yield earned on the cash held at the Federal Reserve Bank and the rate paid on the related FHLB borrowings than in the prior quarter, as well as to a higher yield on the FHLB stock holdings in the current quarter.

Total liabilities were $7.86 billion at March 31, 2017 compared to $7.87 billion at September 30, 2016.  FHLB borrowings decreased $99.3 million, to $2.27 billion at March 31, 2017, due to the maturity of a $100.0 million FHLB advance during the December 31, 2016 quarter, which was not replaced.  Deposits increased $105.2 million, to $5.27 billion at March 31, 2017, due largely to a $124.0 million increase in non-maturity deposits, partially offset by a $22.4 million decrease in public unit deposits.

Stockholders' equity was $1.38 billion at March 31, 2017 compared to $1.39 billion at September 30, 2016.  The $10.7 million decrease was due primarily to the payment of $61.6 million in cash dividends, partially offset by net income of $42.2 million.  The cash dividends paid during the current year six month period totaled $0.46 per share and consisted of a $0.29 per share cash true-up dividend related to fiscal year 2016 earnings per the Company's dividend policy, and two regular quarterly cash dividends totaling $0.17 per share.  On April 19, 2017, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on May 19, 2017 to stockholders of record as of the close of business on May 5, 2017.

At March 31, 2017, Capitol Federal Financial, Inc., at the holding company level, had $95.7 million on deposit at the Bank.  For fiscal year 2017, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders.  Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

In October 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock.  The repurchase plan does not have an expiration date.  The Company has not repurchased any shares under the repurchase plan through the date of this release.

The following table presents the balance of stockholders' equity and related information as of the dates presented.

The following table presents a reconciliation of total to net shares outstanding as of March 31, 2017. 

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a "well-capitalized" status for the Bank in accordance with regulatory standards.  As of March 31, 2017, the Bank and Company exceeded all regulatory capital requirements.  The following table presents the Bank's regulatory capital ratios at March 31, 2017.

A reconciliation of the Bank's equity under accounting principles generally accepted in the United States of America ("GAAP") to regulatory capital amounts as of March 31, 2017 is as follows (dollars in thousands):

Capitol Federal Financial, Inc. is the holding company for the Bank.  The Bank has 47 branch locations in Kansas and Missouri, and is one of the largest residential lenders in the State of Kansas.  News and other information about the Company can be found on the Internet at the Bank's website, http://www.capfed.com.

Except for the historical information contained in this press release, the matters discussed may be deemed to be "forward-looking statements" within the meaning 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.  The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," and similar expressions are intended to identify forward-looking statements.  Forward-looking statements that involve risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies and other governmental initiatives affecting the financial services industry, fluctuations in interest rates, demand for loans in the Company's market area, the future earnings and capital levels of the Bank, which would affect the ability of the Company to pay dividends in accordance with its dividend policies, competition, and other risks detailed from time to time in documents filed or furnished by the Company with the SEC.  Actual results may differ materially from those currently expected.  These forward-looking statements represent the Company's judgment as of the date of this release.  The Company disclaims, however, any intent or obligation to update these forward-looking statements.

SUPPLEMENTAL FINANCIAL INFORMATION

The following is a reconciliation of the basic and diluted earnings per share calculations for the periods indicated.

Loan Portfolio

The following table presents information related to the composition of our loan portfolio in terms of dollar amounts, weighted average rates, and percentages as of the dates indicated.

Loan Activity:  The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs.  Loans that were paid-off as a result of refinances are included in repayments.  Loan endorsements are not included in the activity in the following tables because a new loan is not generated at the time of the endorsement.  The endorsed balance and rate are included in the ending loan portfolio balance and rate.  During the three and six months ended March 31, 2017, the Bank endorsed $5.7 million and $39.5 million of one- to four-family loans, respectively, reducing the average rate on those loans by 47 and 83 basis points, respectively.

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total.  Loan originations, purchases, and refinances are reported together.  The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years.  The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination, and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination.