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

TOPEKA, Kan., Jan. 27, 2017 /PRNewswire/ -- Capitol Federal Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the quarter ended December 31, 2016.  Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, which will be filed with the Securities and Exchange Commission ("SEC") on or about February 9, 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 $20.6 million, including $642 thousand from the leverage strategy;
• basic and diluted earnings per share of $0.15;
• annualized loan portfolio growth of 6.5%;
• net interest margin of 1.73% (2.07% excluding the effects of the leverage strategy); and
• dividends paid of $50.2 million, or $0.375 per share.

Comparison of Operating Results for the Three Months Ended December 31, 2016 and September 30, 2016

For the quarter ended December 31, 2016, the Company recognized net income of $20.6 million, or $0.15 per share, compared to net income of $20.7 million, or $0.16 per share, for the quarter ended September 30, 2016.  The decrease in earnings per share was due to the decrease in net income between quarters along with an increase in average shares outstanding during the current quarter.

Capitol Federal Savings Bank (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 either on the Bank's Federal Home Loan Bank Topeka ("FHLB") line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB.  The borrowings were repaid prior to quarter end for regulatory purposes.  The proceeds from the borrowings, net of the required FHLB stock holdings, were deposited at the Federal Reserve Bank of Kansas City.  Net income attributable to the leverage strategy was $642 thousand during the current quarter, compared to $616 thousand for the prior quarter.

Net interest income decreased $426 thousand, or 0.9%, from the prior quarter to $47.3 million for the current quarter.  The net interest margin decreased one basis point from 1.74% for the prior quarter to 1.73% for the current quarter.  Excluding the effects of the leverage strategy, the net interest margin would have decreased two basis points from 2.09% for the prior quarter to 2.07% for the current quarter.  The decrease in the net interest margin was due mainly to an increase in interest expense on deposits and an increase in the average balance of operating cash which excludes funds related to the leverage strategy, partially offset by a decrease in interest expense on term borrowings.  The positive impact on the net interest margin resulting from 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 loan portfolio yield.

Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter increased one basis point from the prior quarter, to 2.76%, while the average balance of interest-earning assets decreased $78.5 million between the two periods.  Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point from the prior quarter, to 3.20%, while the average balance would have decreased $10.0 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 $116.4 million increase in the average balance of the portfolio, partially offset by a four basis point decrease in the weighted average yield on the portfolio, to 3.53% for the current quarter.  The loan growth was funded with cash flows from the securities portfolio and utilizing excess operating cash.  The decrease in the weighted average yield was due primarily to loans repricing to lower market rates and the origination and purchase of loans at rates less than the existing portfolio rate, along with an increase in premium amortization related to correspondent loans due to both the increase in the size of the correspondent loan portfolio and repayment activity.

The decrease in interest income on MBS was due mainly to a $92.2 million decrease in the average balance of the portfolio as cash flows were used to fund loan growth and pay off a maturing FHLB advance.  During the current quarter, $1.3 million of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 43 basis points.  During the prior quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 42 basis points. As of December 31, 2016, the remaining net balance of premiums on our portfolio of MBS was $11.9 million.

The decrease in interest income on investment securities was due primarily to a $75.2 million decrease in the average balance of the portfolio as cash flows were used to fund loan growth and pay off a maturing FHLB advance, along with a six basis point decrease in the weighted average yield on the portfolio, to 1.24% for the current quarter.  The decrease in the weighted average yield was due to the prior quarter including more discount accretion than the current quarter due to the call of securities in the prior quarter.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities for the current quarter increased two basis points from the prior quarter, to 1.15%, while the average balance of interest-bearing liabilities decreased $96.8 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 1.30%, while the average balance would have decreased $28.3 million.  The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

The decrease in interest expense on FHLB advances was due to an $82.2 million decrease in the average balance of the portfolio, partially offset by a five basis point increase in the weighted average rate paid during the current quarter, to 2.27%.  During the current 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.

The increase in interest expense on deposits was due primarily to a $53.9 million increase in the average balance of the deposit portfolio, along with a one basis point increase in the weighted average rate paid on the deposit portfolio, to 0.80% for the current quarter.  The increase between quarters in the average balance and the weighted average rate paid was due largely to changes in the certificate of deposit portfolio.

Provision for Credit Losses
The Bank did not record a provision for credit losses during the current quarter compared to a negative provision for credit losses during the prior quarter of $750 thousand.  Based on management's assessment of the allowance for credit losses ("ACL") formula analysis model and several other factors, management determined that no provision for credit losses was necessary in the current quarter. Net loan charge-offs were $19 thousand during the current quarter compared to $22 thousand in the prior quarter.  At December 31, 2016, loans 30 to 89 days delinquent were 0.35% of total loans and loans 90 or more days delinquent or in foreclosure were 0.22% 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 decrease in other non-interest income was due primarily to a decrease in insurance commissions resulting from the receipt of annual commissions from certain insurance providers during the prior quarter and no such commissions being received in the current 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 decrease in regulatory and outside services was due primarily to the timing of external audit fees.  The decrease in advertising and promotional expense was due mainly to the timing of media campaigns and sponsorships.  The decrease in office supplies and related expense was due mainly to the timing of certain expenses.  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 Company's efficiency ratio was 41.08% for the current quarter compared to 44.85% for the prior quarter.  The change in the efficiency ratio was due primarily to a decrease in non-interest expense, mainly a result of the change in the method of accounting for low income housing partnerships.  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 lower level of expense.

Income Tax Expense
Income tax expense was $10.4 million for the current quarter, compared to $9.5 million for the prior quarter.  The effective tax rate for the current quarter was 33.6% compared to 31.5% for the prior quarter. The increase in effective tax rate was due primarily to the change in accounting for low income housing partnerships as previously discussed.  Management anticipates the effective tax rate for fiscal year 2017 will be approximately 34%, based on fiscal year 2017 estimates as of December 31, 2016.

Comparison of Operating Results for the Three Months Ended December 31, 2016 and 2015

The Company recognized net income of $20.6 million, or $0.15 per share, for the quarter ended December 31, 2016, a decrease of $140 thousand, or 0.7%, from the quarter ended December 31, 2015.  The Company's efficiency ratio was 41.08% for the current quarter compared to 44.05% for the prior year quarter.  The change in the efficiency ratio was due primarily to a decrease in non-interest expense. See "Non-interest Expense" section below for additional information regarding the decrease in expense.

Net income attributable to the leverage strategy was $642 thousand during the current quarter, compared to $583 thousand for the prior year quarter.  The increase was due primarily to a decrease in the Federal Deposit Insurance Corporation ("FDIC") base assessment rate, as a portion of federal insurance premiums are attributable to the leverage strategy due to the increase in average assets resulting from the strategy.  The decrease in the FDIC base assessment rate was effective July 1, 2016 and was the result of the FDIC Deposit Insurance Fund reaching 1.15% of total estimated insured deposits of the banking system on June 30, 2016.

The net interest margin decreased two basis points, from 1.75% for the prior year quarter to 1.73% for the current year quarter.  Excluding the effects of the leverage strategy, the net interest margin would have decreased four basis points, from 2.11% for the prior year quarter to 2.07% for the current year quarter.  The decrease in the net interest margin was due mainly to an increase in interest expense on deposits and a decrease in the yield on the MBS portfolio, partially offset by a decrease in interest expense on borrowings not related to the leverage strategy.  The positive impact on the net interest margin resulting from 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 loan portfolio yield.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased five basis points, from 2.71% for the prior year quarter to 2.76% for the current quarter, and the average balance of interest-earning assets decreased $56.4 million from the prior year quarter.  Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point, from 3.21% for the prior year quarter to 3.20% for the current quarter, while the average balance would have increased $12.1 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 $363.6 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 quarter.  Loan growth was primarily funded through cash flows from the securities portfolio.  The decrease in the weighted average yield was due primarily to an increase in the amortization of premiums related to correspondent loans due mainly to repayment activity, along with loans repricing to lower market rates 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 $212.3 million decrease in the average balance of the portfolio as cash flows not reinvested were used to fund loan growth and pay off maturing FHLB advances.  Additionally, the weighted average yield on the MBS portfolio decreased 10 basis points, from 2.22% during the prior year quarter to 2.12% for the current quarter.  The decrease in the weighted average yield was due to an increase in the impact of net premium amortization.  Net premium amortization of $1.3 million during the current quarter decreased the weighted average yield on the portfolio by 43 basis points.  During the prior year quarter, $1.2 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 25 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 $146.5 million decrease in the average balance.  Cash flows not reinvested in the portfolio were used to fund loan growth and pay off maturing FHLB advances.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased seven basis points, from 1.08% for the prior year quarter to 1.15% for the current quarter, while the average balance of interest-bearing liabilities decreased $31.6 million from the prior year quarter.  Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased two basis points from the prior year quarter, to 1.30% for the current quarter, while the average balance of interest-bearing liabilities would have increased $36.8 million.  The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

The decrease in interest expense on FHLB advances was due to a $217.9 million decrease in the average balance of the portfolio as a result of not replacing all of the FHLB advances that matured between periods, partially offset by a three basis point increase in the weighted average rate paid on the portfolio, to 2.27% for the current quarter.  Cash flows from the deposit and securities portfolios were used to pay off the maturing FHLB advances.  The increase in the weighted average rate paid was due to the maturing FHLB advances having a lower rate than the overall FHLB advance portfolio rate.  The increase in interest expense on FHLB leverage strategy borrowings was due to a 23 basis point increase in the weighted average rate paid due to an increase in interest rates between periods.

The increase in interest expense on deposits was due primarily to a nine basis point increase in the weighted average rate, to 0.80% for the current quarter, 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 $254.7 million for the current quarter, 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 a decrease in the yield on the Bank's BOLI policies.

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 FDIC base assessment rate.  The decrease in advertising and promotional expense was due mainly to the timing of media campaigns and sponsorships.  The decrease in office supplies and related expense was due primarily to the purchase of cards enabled with chip card technology during the prior year quarter and no such expenses in the current quarter.  The decrease in low income housing partnerships expense was due to a change in accounting method as previously discussed.  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 quarter, along with a decrease in other real estate owned ("OREO") operations expense.

Income Tax Expense
Income tax expense was $10.4 million for the current quarter compared to $9.2 million for the prior year quarter.  The effective tax rate for the current quarter was 33.6% compared to 30.8% for the prior year quarter.  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 December 31, 2016 

Total assets were $9.14 billion at December 31, 2016 compared to $9.27 billion at September 30, 2016.  The $127.7 million decrease was due primarily to a $131.2 million decrease in cash and cash equivalents and a $106.2 million decrease in the securities portfolio.  These cash flows were used to fund loan growth and pay off a maturing $100.0 million FHLB advance during the current quarter.

The loans receivable portfolio, net, increased $113.4 million to $7.07 billion at December 31, 2016, from $6.96 billion at September 30, 2016.  This growth was primarily funded with cash flows from the securities portfolio.  During the current quarter, the Bank originated and refinanced $223.1 million of loans with a weighted average rate of 3.32% and purchased $180.6 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.33%.  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 $24.5 million had not yet been funded as of December 31, 2016.

Total liabilities were $7.77 billion at December 31, 2016 compared to $7.87 billion at September 30, 2016.  The $102.9 million decrease was due primarily to a $99.6 million decrease in FHLB borrowings as a result of the maturity of a $100.0 million FHLB advance during the current quarter which was not replaced.

Stockholders' equity was $1.37 billion at December 31, 2016 compared to $1.39 billion at September 30, 2016.  The $24.8 million decrease was due primarily to the payment of $50.2 million in cash dividends, partially offset by net income of $20.6 million.  The cash dividends paid during the current quarter totaled $0.375 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 a regular quarterly cash dividend of $0.085 per share.  On January 24, 2017, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on February 17, 2017 to stockholders of record as of the close of business on February 3, 2017.

At December 31, 2016, Capitol Federal Financial, Inc., at the holding company level, had $83.6 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 December 31, 2016. 

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 December 31, 2016, the Bank and Company exceeded all regulatory capital requirements.  The following table presents the Bank's regulatory capital ratios at December 31, 2016.

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 December 31, 2016 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 table summarizes activity in our loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in undisbursed loan funds, 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 quarters ended December 31, 2016 and 2015, the Bank endorsed $33.8 million and $23.6 million of one- to four-family loans, respectively, reducing the average rate on those loans by 89 and 90 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.  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.