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

TOPEKA, Kan., Oct. 27, 2017 /PRNewswire/ -- Capitol Federal Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the fiscal year ended September 30, 2017.  Detailed results will be available in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017, which will be filed with the Securities and Exchange Commission ("SEC") on or about November 29, 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 fourth quarter include:

• net income of $20.6 million;
• basic and diluted earnings per share of $0.15;
• net interest margin of 1.84% (2.21% excluding the effects of the leverage strategy); and
• dividends paid of $11.4 million, or $0.085 per share.

Highlights for the fiscal year include:

• net income of $84.1 million;
• basic and diluted earnings per share of $0.63;
• net interest margin of 1.79% (2.15% excluding the effects of the leverage strategy);
• dividends paid of $118.0 million, or $0.88 per share; and
• declared a fiscal year 2017 cash true-up dividend of $0.29 per share, payable on December 1, 2017.

Comparison of Operating Results for the Years Ended September 30, 2017 and 2016

For fiscal year 2017, the Company recognized net income of $84.1 million, or $0.63 per share, compared to net income of $83.5 million, or $0.63 per share, for fiscal year 2016.  The increase in net income was due primarily to a $3.2 million increase in net interest income, partially offset by a $1.1 million decrease in non-interest income. Additionally, no provision for credit losses was recorded in fiscal year 2017, compared to a negative provision for credit losses of $750 thousand in fiscal year 2016.

The net interest margin increased four basis points, from 1.75% for the prior fiscal year to 1.79% for the current fiscal year.  Excluding the effects of the leverage strategy, the net interest margin would have increased five basis points, from 2.10% for the prior fiscal year to 2.15% for the current fiscal year.  The increase in the net interest margin was due mainly to a shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans, partially offset by a decrease in the weighted average yield on loans.  The positive impact of the decrease in interest expense on borrowings not related to the leverage strategy was offset by an increase in interest expense on deposits.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased 13 basis points, from 2.74% for the prior fiscal year to 2.87% for the current fiscal year, while the average balance of interest-earning assets decreased $100.0 million from the prior fiscal year.  Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased six basis points, from 3.21% for the prior fiscal year to 3.27% for the current fiscal year, while the average balance would have decreased $59.6 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 $384.4 million increase in the average balance of the portfolio, partially offset by a six basis point decrease in the weighted average yield on the portfolio to 3.54% for the current fiscal year.  Loan growth was 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, the origination and purchase of loans at rates lower than the overall loan portfolio rate at certain points during each year, and an increase in the amortization of premiums related to correspondent loans.

The decrease in interest income on the MBS portfolio was due to a $278.1 million decrease in the average balance of the portfolio as cash flows not reinvested were used primarily to fund loan growth and pay off maturing FHLB borrowings.  The weighted average yield on the MBS portfolio increased one basis point, from 2.18% during the prior fiscal year to 2.19% for the current fiscal year.  Net premium amortization of $4.2 million during the current fiscal year decreased the weighted average yield on the portfolio by 39 basis points.  During the prior fiscal year, $5.0 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 37 basis points.  As of September 30, 2017, the remaining net balance of premiums on our portfolio of MBS was $9.0 million.

The increase in interest income on cash and cash equivalents was due to a 45 basis point increase in the weighted average yield resulting from an increase in the yield earned on balances held at the Federal Reserve Bank of Kansas City (the "FRB of Kansas City").

The decrease in interest income on investment securities was due to a $140.1 million decrease in the average balance.  Cash flows not reinvested in the portfolio were used primarily to fund loan growth and pay off maturing FHLB borrowings.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased 10 basis points, from 1.11% for the prior fiscal year to 1.21% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $76.2 million from the prior year fiscal year.  Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased one basis point, from 1.28% for the prior fiscal year to 1.29% for the current fiscal year, while the average balance of interest-bearing liabilities would have decreased $35.8 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 table above includes interest expense on FHLB borrowings both associated and not associated with the leverage strategy.  Interest expense on FHLB borrowings not related to the leverage strategy decreased $4.6 million from the prior fiscal year due to a $221.0 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 primarily used to pay off the maturing advances, along with some cash flows from the securities portfolio.  The weighted average rate paid on FHLB borrowings not related to the leverage strategy increased one basis point, to 2.24% for the current fiscal year.  Interest expense on FHLB borrowings associated with the leverage strategy increased $8.4 million from the prior fiscal year due to a 43 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 0.82% for the current fiscal year, along with growth in the portfolio.  The increase in the weighted average rate was primarily related to the retail certificate of deposit portfolio, which increased 10 basis points to 1.46% for the current fiscal year.  The average balance of the deposit portfolio increased $185.2 million during the current fiscal year, with the majority of the increase in retail deposits.

Provision for Credit Losses
Capitol Federal Savings Bank (the "Bank") did not record a provision for credit losses during the current fiscal year, compared to a negative provision for credit losses of $750 thousand during the prior fiscal year.  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 for the current fiscal year.  Net loan charge-offs were $142 thousand during the current fiscal year compared to $153 thousand in the prior fiscal year.  At September 30, 2017, loans 30 to 89 days delinquent were 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.13% 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 income from BOLI was due mainly to the receipt of a death benefit during the prior fiscal year with no such death benefit in the current fiscal year.

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 salaries and employee benefits was due primarily to an increase in employee health care costs.  The increase in information technology and communications was due largely to software licensing expenses, website hosting expenses, 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 fiscal year, 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 a decrease in other real estate owned ("OREO") operations expense, along with lower deposit account charge-offs related to debit card fraud in the current fiscal year.

The Company's efficiency ratio was 41.21% for the current fiscal year compared to 43.76% for the prior fiscal year.  The improvement in the efficiency ratio was due primarily to lower non-interest expense in the current year compared to the prior year period.  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 $43.8 million for the current fiscal year compared to $38.4 million for the prior year fiscal year.  The effective tax rate for the current fiscal year was 34.2% compared to 31.5% for the prior year fiscal year.  The increase in effective tax rate was due mainly to the change in accounting method for low income housing partnerships as previously discussed.  Management anticipates the effective tax rate for fiscal year 2018 will be approximately 34%.

Comparison of Operating Results for the Three Months Ended September 30, 2017 and June 30, 2017

For the quarter ended September 30, 2017, the Company recognized net income of $20.6 million, or $0.15 per share, compared to net income of $21.4 million, or $0.16 per share, for the quarter ended June 30, 2017.  The decrease in net income was due primarily to an increase in non-interest expense.  Net interest income increased $294 thousand, or 0.6%, from the prior quarter to $49.7 million for the current quarter.  The net interest margin increased three basis point from 1.81% for the prior quarter to 1.84% for the current quarter.  Excluding the effects of the leverage strategy, the net interest margin would have increased five basis point from 2.16% for the prior quarter to 2.21% for the current quarter.  The increase in the net interest margin was due mainly to a decrease in interest expense on borrowings not related to the leverage strategy.  The Company's efficiency ratio was 42.26% for the current quarter compared to 41.30% for the prior quarter.  The change in the efficiency ratio was due primarily to higher non-interest expense in the current quarter compared to the prior quarter. 

Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter increased seven basis points from the prior quarter, to 2.98%, while the average balance of interest-earning assets decreased $126.6 million between the two periods.  Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased four basis points from the prior quarter, to 3.32%, while the average balance would have decreased $104.5 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 two basis point increase in the weighted average yield on the portfolio to 3.56% for the current quarter.  The increase in the weighted average yield was due primarily to originating/purchasing loans at rates higher than the overall portfolio rate.

The decrease in interest income on MBS was due mainly to a $73.3 million decrease in the average balance of the portfolio.  The weighted average yield on the portfolio increased one basis point, to 2.22% for the current quarter.  During the current quarter, $937 thousand of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 39 basis points.  During the prior quarter, $992 thousand of net premiums were amortized, which decreased the weighted average yield on the portfolio by 38 basis points.

The increase in interest income on cash and cash equivalents was due primarily to a 21 basis point increase in the weighted average yield, to 1.25% for the current quarter, resulting from an increase in the yield earned on balances held at the FRB of Kansas City.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities for the current quarter increased three basis points from the prior quarter, to 1.27%, while the average balance of interest-bearing liabilities decreased $110.3 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 decreased two basis points from the prior quarter, to 1.28%, and the average balance would have decreased $88.2 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 table above includes interest expense on FHLB borrowings both associated and not associated with the leverage strategy.  Interest expense on FHLB borrowings not related to the leverage strategy decreased $890 thousand from the prior quarter due mainly to a 13 basis point decrease in the weighted average rate paid on the portfolio, to 2.12% for the current quarter, along with a $60.1 million decrease in the average balance of the portfolio.  During the prior quarter, $300.0 million of advances with an effective rate of 3.24% matured, of which $200.0 million were replaced in the current quarter with an effective rate of 1.99%.  Interest expense on FHLB borrowings associated with the leverage strategy increased $1.1 million from the prior quarter due to a 22 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 to a three basis point increase in the weighted average rate, to 0.86% for the current quarter.  The increase in the weighted average rate was primarily related to the wholesale certificate of deposit portfolio, which increased 21 basis points to 1.17% for the current quarter.

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 a gain on the sale of loans during the current quarter and an increase in insurance commissions resulting from the receipt of annual commissions from certain insurance providers.

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 regulatory and outside services was due mainly to the timing of audit-related expenses.  The increase in other non-interest expense was due primarily to an increase in OREO operations expense.

Income Tax Expense
Income tax expense was $11.5 million for the current quarter, compared to $10.8 million for the prior quarter.  The effective tax rate was 35.8% for the current quarter and 33.6% for the prior quarter. The increase in effective tax rate was mainly a result of increasing income tax expense to account for the impact of a higher effective tax rate year-to-date, primarily a result of year-end tax accounting adjustments to the low income housing partnership investments and related deferred tax assets.

Financial Condition as of September 30, 2017 

Total assets were $9.19 billion at September 30, 2017 compared to $9.27 billion at September 30, 2016.  The $74.3 million decrease was due primarily to a $384.6 million decrease in the securities portfolio, partially offset by an increase in the loan portfolio.

The loans receivable portfolio, net, increased $237.0 million to $7.20 billion at September 30, 2017, from $6.96 billion at September 30, 2016.  During the current fiscal year, the Bank originated and refinanced $698.5 million of loans with a weighted average rate of 3.68% and purchased $563.2 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.60%.  The Bank also entered into participations of $67.7 million of commercial real estate loans with a weighted average rate of 3.98%, of which $43.2 million had not yet been funded as of September 30, 2017.

Loan activity in the current fiscal year decreased compared to the prior fiscal year due to the Bank managing the size of the loan portfolio as it manages its liquidity levels.  Loan volume has primarily been maintained through the rates offered to correspondent lenders.  Generally, over the past couple years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to pay down FHLB advances.  By moving cash from lower yielding assets to higher yielding assets and repaying higher cost liabilities, we have been able to maintain our net interest margin.  In addition to the repayment of securities, the Bank has emphasized growth in the deposit portfolio in part to pay down FHLB advances.  The ratio of securities and cash to total assets was 17.4% at September 30, 2017, and we will be managing this ratio to approximately 15%.  In the long run, management considers a ten percent ratio of stockholders' equity to total assets at the Bank as an appropriate level of capital.  At September 30, 2017, this ratio was 13.1%.

The Bank continued to utilize a leverage strategy to increase earnings.  The leverage strategy during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's 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 each quarter end for regulatory purposes.  The proceeds from the borrowings, net of the required FHLB stock holdings, which yielded approximately 6.4% during the current fiscal year, were deposited at the FRB of Kansas City.  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 FRB of Kansas City 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 $633 thousand during the current quarter and $2.8 million during the current fiscal year, compared to $2.3 million for the prior fiscal year.  The increase was due primarily to a more positive interest rate spread between the yield earned on the cash held at the FRB of Kansas City and the rate paid on the related FHLB borrowings than in the prior fiscal year period, as well as to a decrease in federal insurance premiums attributed to the strategy and an increase in the yield on the FHLB stock attributed to the strategy.

Total liabilities were $7.82 billion at September 30, 2017 compared to $7.87 billion at September 30, 2016.  FHLB borrowings decreased $198.6 million, to $2.17 billion at September 30, 2017, as certain maturing FHLB advances were not replaced.  Deposits increased $145.9 million, to $5.31 billion at September 30, 2017, due mainly to increases in wholesale certificates and non-maturity retail deposits.

Stockholders' equity was $1.37 billion at September 30, 2017 compared to $1.39 billion at September 30, 2016.  The $24.7 million decrease was due primarily to the payment of $118.0 million in cash dividends, partially offset by net income of $84.1 million.  The cash dividends paid during the current fiscal year totaled $0.88 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, a $0.25 per share True Blue Capitol dividend, and four regular quarterly cash dividends totaling $0.34 per share. 

On October 18, 2017, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on November 17, 2017 to stockholders of record as of the close of business on November 3, 2017.  On October 27, 2017, the Company announced a fiscal year 2017 cash true-up dividend of $0.29 per share, or approximately $39.0 million, related to fiscal year 2017 earnings.  The $0.29 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2017 and total regular quarterly cash dividends paid during fiscal year 2017, divided by the number of shares outstanding as of October 24, 2017.  The cash true-up dividend is payable on December 1, 2017 to stockholders of record as of the close of business on November 17, 2017, and is the result of the Board of Directors' commitment to distribute to stockholders 100% of the annual earnings of Capitol Federal Financial, Inc. for fiscal year 2017.

At September 30, 2017, Capitol Federal Financial, Inc., at the holding company level, had $120.8 million on deposit at the Bank.  For fiscal year 2018, 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 September 30, 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 September 30, 2017, the Bank and Company exceeded all regulatory capital requirements.  The following table presents the Bank's regulatory capital ratios at September 30, 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 September 30, 2017 is as follows (dollars in thousands):

The Fiscal Year 2017 Annual Meeting of Stockholders will be held on January 23, 2018, and the voting record date will be December 1, 2017. Management plans to furnish the Company's September 30, 2017 annual proxy materials to stockholders via the internet.  A notice containing instructions on how to access the proxy materials over the internet and vote online will be mailed to stockholders who are eligible to vote at the Fiscal Year 2017 Annual Meeting of Stockholders at least 40 days prior to the Annual Meeting. The notice will explain how a stockholder can arrange to have printed materials sent to them, if so desired. Proxy materials will include the definitive proxy statement for the Fiscal Year 2017 Annual Meeting of Stockholders, and the September 30, 2017 Annual Report to Stockholders.

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 fiscal years ended September 30, 2017 and 2016, the Bank endorsed $53.1 million and $160.0 million of one- to four-family loans, respectively, reducing the average rate on those loans by 71 and 91 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.