Capitol Federal Financial, Inc.® Reports Second Quarter Fiscal Year 2019 Results

TOPEKA, Kan.–(BUSINESS WIRE)–Capitol Federal Financial, Inc.® (NASDAQ: CFFN) (the
“Company”), the parent company of Capitol Federal Savings Bank (the
“Bank”), announced results today for the quarter ended March 31, 2019.
Detailed results will be available in the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2019, which will be filed with
the Securities and Exchange Commission (“SEC”) on or about May 10, 2019
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 $24.6 million;
  • basic and diluted earnings per share of $0.18;
  • net interest margin of 2.33%;
  • originated $92.7 million of commercial loans;
  • annualized deposit portfolio growth of 10%; and
  • paid dividends of $11.7 million, or $0.085 per share.

During April 2019, the Bank completed the integration of the operations
of Capital City Bank into the Bank’s operations. The Company completed
its acquisition of Capital City Bank and its parent company, Capital
City Bancshares, Inc. (“CCB”), on August 31, 2018.

The acquisition of Capital City Bank, a commercial bank with $450
million in assets, allows us to advance our commercial banking strategy
through enhanced commercial deposit and lending products while managing
to stay under $10 billion in assets. The acquisition allows the Bank to
compete for commercial banking business through a wide variety of
commercial deposit services and expanded commercial lending products, as
well as trust and brokerage services. A few of the potential benefits of
expanding the commercial banking business include the following:

  • the ability to reinvest correspondent loan repayments into higher
    yielding commercial loans;
  • the ability to reduce the cost of funds by replacing Federal Home Loan
    Bank Topeka (“FHLB”) borrowings and wholesale deposits with
    lower-costing commercial deposits;
  • the ability to reduce the Bank’s loans-to-deposits ratio as a result
    of an increase in commercial deposits;
  • the ability to diversify the Bank’s revenue streams and increased
    cross-selling opportunities by leveraging access to new products for
    existing customers and expanding our new customer base; and
  • the ability to increase earnings through a remix of assets,
    diversified revenue sources and lower cost funding.

Comparison of Operating Results for the Three Months Ended March 31,
2019 and December 31, 2018

For the quarter ended March 31, 2019, the Company recognized net income
of $24.6 million, or $0.18 per share, compared to net income of $24.4
million, or $0.18 per share, for the quarter ended December 31, 2018.

Net interest income increased $296 thousand, or 0.6%, from the prior
quarter to $52.6 million for the current quarter. The net interest
margin increased six basis points from 2.27% for the prior quarter to
2.33% for the current quarter. The leverage strategy was in place at
certain times during the prior quarter, but was not utilized during the
current quarter. Excluding the effects of the leverage strategy, the net
interest margin would have increased one basis point from 2.32% for the
prior quarter to 2.33% for the current quarter.

Interest and Dividend Income

The weighted average yield on total interest-earning assets for the
current quarter increased eight basis points, from 3.56% for the prior
quarter to 3.64% for the current quarter, while the average balance of
interest-earning assets decreased $204.6 million between the two
periods. Absent the impact of the leverage strategy, the weighted
average yield on total interest-earning assets would have increased five
basis points, from 3.59% for the prior quarter to 3.64% for the current
quarter, and the average balance of interest-earning assets would have
increased $23.6 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.

      For the Three Months Ended            
March 31,       December 31, Change Expressed in:
2019 2018 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 71,657 $ 70,772 $ 885 1.3 %
Mortgage-backed securities (“MBS”) 6,301 6,523 (222 ) (3.4 )
FHLB stock 1,831 1,971 (140 ) (7.1 )
Investment securities 1,505 1,441 64 4.4
Cash and cash equivalents 743   1,714   (971 ) (56.7 )
Total interest and dividend income $ 82,037   $ 82,421   $ (384 ) (0.5 )
 

The increase in interest income on loans receivable was due to a $42.1
million increase in the average balance of the portfolio, as well as a
four basis point increase in the weighted average yield on the portfolio
to 3.79% for the current quarter. The increase in the weighted average
yield was due primarily to the origination of loans at higher market
rates and adjustable-rate loans repricing to higher market rates.

The decrease in interest income on the MBS portfolio was due to a $47.7
million decrease in the average balance of the portfolio, partially
offset by a four basis point increase in the weighted average yield on
the portfolio to 2.63% for the current quarter. The increase in the
weighted average yield was due primarily to a decrease in net premium
amortization in the current quarter, as well as adjustable-rate MBS
repricing to higher market rates. Net premium amortization of $309
thousand during the current quarter decreased the weighted average yield
on the portfolio by 12 basis points. During the prior quarter, $349
thousand of net premiums were amortized which decreased the weighted
average yield on the portfolio by 14 basis points. As of March 31, 2019,
the remaining net balance of premiums on our portfolio of MBS was $2.4
million.

The table above includes interest income on cash and cash equivalents
associated and not associated with the leverage strategy. Interest
income on cash and cash equivalents not related to the leverage strategy
increased $255 thousand from the prior quarter due to a $37.5 million
increase in the average balance, as well as a 19 basis point increase in
the weighted average yield, which was related to balances held at the
Federal Reserve Bank of Kansas City (the “FRB of Kansas City”). Interest
income on cash associated with the leverage strategy decreased $1.2
million from the prior quarter due to the leverage strategy not being in
place during the current quarter. See additional discussion regarding
the leverage strategy in the Financial Condition section below.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities for
the current quarter increased three basis points, from 1.48% for the
prior quarter to 1.51% for the current quarter, while the average
balance of interest-bearing liabilities decreased $130.3 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 five basis points, from 1.46% for
the prior quarter to 1.51% for the current quarter, and the average
balance of interest-bearing liabilities would have increased $97.9
million. The following table presents the components of interest expense
for the time periods presented, along with the change measured in
dollars and percent.

      For the Three Months Ended            
March 31,       December 31, Change Expressed in:
2019 2018 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits $ 16,096 $ 15,725 $ 371 2.4 %
FHLB borrowings 12,525 13,530 (1,005 ) (7.4 )
Other borrowings 819   865   (46 ) (5.3 )
Total interest expense $ 29,440   $ 30,120   $ (680 ) (2.3 )
 

The increase in interest expense on deposits was due primarily to a
three basis point increase in the weighted average rate paid, to 1.16%
for the current quarter, as well as a $74.7 million increase in the
average balance of the portfolio. The increase in the weighted average
rate paid was due primarily to increases in the average retail/business
certificate of deposit portfolio rate and wholesale certificate of
deposit portfolio rate, which increased five basis points and 19 basis
points, respectively.

The table above includes interest expense on FHLB borrowings associated
and not associated with the leverage strategy. Interest expense on FHLB
borrowings not related to the leverage strategy increased $372 thousand
from the prior quarter due to a 10 basis point increase in the weighted
average rate paid, to 2.30% for the current quarter. The increase in the
weighted average rate paid was due mainly to a full quarter impact of
advances that matured in the prior quarter being replaced at higher
market rates. Interest expense on FHLB borrowings associated with the
leverage strategy decreased $1.4 million from the prior quarter due to
the leverage strategy not being in place during the current quarter.

Provision for Credit Losses

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 recoveries were $61 thousand during the current
quarter compared to $95 thousand in the prior quarter. At March 31,
2019, loans 30 to 89 days delinquent were 0.23% of total loans and loans
90 or more days delinquent or in foreclosure were 0.12% of total loans.
At December 31, 2018, loans 30 to 89 days delinquent were 0.20% of total
loans and loans 90 or more days delinquent or in foreclosure were 0.13%
of total loans. See additional ACL discussion in the Supplemental
Financial Information – Asset Quality section of this release.

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.

      For the Three Months Ended            
March 31,       December 31, Change Expressed in:
2019 2018 Dollars Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees $ 3,091 $ 3,352 $ (261 ) (7.8 )%
Income from bank-owned life insurance (“BOLI”) 587 635 (48 ) (7.6 )
Other non-interest income 1,323   1,437   (114 ) (7.9 )
Total non-interest income $ 5,001   $ 5,424   $ (423 ) (7.8 )
 

The decrease in deposit service fees was due mainly to a decrease in
debit card and service charge income resulting from a reduction in
transaction volume due to the seasonality of such activity, partially
offset by lower interchange network charges 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.

      For the Three Months Ended            
March 31,       December 31, Change Expressed in:
2019 2018 Dollars Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 12,789 $ 12,962 $ (173 ) (1.3 )%
Information technology and related expense 4,284 4,599 (315 ) (6.8 )
Occupancy, net 3,292 3,252 40 1.2
Regulatory and outside services 1,056 1,766 (710 ) (40.2 )
Advertising and promotional 1,390 760 630 82.9
Deposit and loan transaction costs 465 736 (271 ) (36.8 )
Office supplies and related expense 736 459 277 60.3
Federal insurance premium 659 528 131 24.8
Other non-interest expense 1,470   1,720   (250 ) (14.5 )
Total non-interest expense $ 26,141   $ 26,782   $ (641 ) (2.4 )
 

The decrease in information technology and related expense was due
primarily to the prior quarter including accelerated depreciation
related to the implementation of enhancements in the Bank’s information
technology infrastructure. The decrease in regulatory and outside
services was due mainly to a decrease in audit fees. The increase in
advertising and promotional was due primarily to the timing of
advertising campaigns and sponsorships. The decrease in deposit and loan
transaction costs was due mainly to a reduction in costs associated with
the Bank’s online banking services. The increase in office supplies and
related expense was due mainly to the timing of such expenses. The
decrease in other non-interest expense was due primarily to a decrease
in other real estate owned (“OREO”) operations expense.

The Company’s efficiency ratio was 45.38% for the current quarter
compared to 46.40% for the prior quarter. The improvement in the
efficiency ratio was due primarily to lower non-interest expense in the
current quarter compared to the prior 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 $6.9 million for the current quarter, compared to
$6.6 million for the prior quarter. The effective tax rate was 21.9% for
the current quarter, compared to 21.2% for the prior quarter. Management
estimates the effective income tax rate for fiscal year 2019 will be
approximately 22%.

Comparison of Operating Results for the Six Months Ended March 31,
2019 and 2018

The Company recognized net income of $48.9 million, or $0.36 per share,
for the six month period ended March 31, 2019, compared to net income of
$55.2 million, or $0.41 per share, for the six month period ended
March 31, 2018. The decrease in net income was due primarily to the
prior year six month period including the impact of the enactment of the
Tax Cuts and Jobs Act (the “Tax Act”) as discussed below, as well as an
increase in non-interest expense. These changes were partially offset by
an increase in net interest income due primarily to the higher yielding
loans added in the CCB acquisition. The Tax Act reduced the federal
corporate income tax rate from 35% to 21% effective January 1, 2018. In
accordance with accounting principles generally accepted in the United
States of America (“GAAP”), the Company revalued its deferred tax assets
and liabilities in December 2017 to account for the lower corporate
income tax rate. The revaluation reduced income tax expense by $7.5
million.

The net interest margin increased 45 basis points, from 1.85% for the
prior year six month period to 2.30% for the current year six month
period. When the leverage strategy is in place, it reduces the net
interest margin due to the amount of earnings from the transaction in
comparison to the size of the transaction. The leverage strategy was
suspended at certain times during the current year six month period due
to the negative interest rate spreads between the related FHLB
borrowings and cash held at the FRB of Kansas City making the
transaction unprofitable. See additional discussion regarding the
leverage strategy in the Financial Condition section below. Excluding
the effects of the leverage strategy, the net interest margin would have
increased 11 basis points, from 2.22% for the prior year six month
period to 2.33% for the current year six month period. The increase in
the net interest margin excluding the effects of the leverage strategy
was due mainly to the addition of higher yielding commercial loans in
the CCB acquisition.

Interest and Dividend Income

The weighted average yield on total interest-earning assets increased 58
basis points, from 3.02% for the prior year six month period to 3.60%
for the current year six month period, while the average balance of
interest-earning assets decreased $1.62 billion 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 29
basis points, from 3.33% for the prior year six month period to 3.62%
for the current year six month period, and the average balance of
interest-earning assets would have increased $272.1 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.

      For the Six Months Ended            
March 31, Change Expressed in:
2019       2018 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 142,429 $ 128,383 $ 14,046 10.9 %
MBS 12,824 10,642 2,182 20.5
FHLB stock 3,802 6,296 (2,494 ) (39.6 )
Investment securities 2,946 2,088 858 41.1
Cash and cash equivalents 2,457   15,009   (12,552 ) (83.6 )
Total interest and dividend income $ 164,458   $ 162,418   $ 2,040   1.3
 

The increase in interest income on loans receivable was due to a $347.4
million increase in the average balance of the portfolio, as well as a
20 basis point increase in the weighted average yield on the portfolio
to 3.77% for the current year six month period. The increase in the
average balance was due mainly to the acquisition of CCB. The increase
in the weighted average yield was also due mainly to the addition of
higher yielding loans associated with the CCB acquisition, as well as
adjustable-rate loans repricing to higher market rates and the
origination and purchase of new loans at higher market rates.

The increase in interest income on the MBS portfolio was due to a 33
basis point increase in the weighted average yield on the portfolio to
2.61% for the current year six month period, along with a $48.6 million
increase in the average balance of the portfolio. The increase in the
weighted average yield was due primarily to a decrease in the impact of
net premium amortization, as well as adjustable-rate MBS repricing to
higher market rates. Net premium amortization of $659 thousand during
the current year six month period decreased the weighted average yield
on the portfolio by 13 basis points. During the prior year six month
period, $1.6 million of net premiums were amortized, which decreased the
weighted average yield on the portfolio by 35 basis points.

The decrease in dividend income on FHLB stock was due to a decrease in
the average balance of FHLB stock as a result of the leverage strategy
not being in place as often during the current year six month period as
compared to the prior year six month period. This was partially offset
by a higher dividend rate on FHLB stock during the current year six
month period.

The increase in interest income on the investment securities portfolio
was due to a 75 basis point increase in the weighted average yield on
the portfolio to 2.13%. The increase in the weighted average yield was
primarily a result of replacing maturing securities at higher market
rates.

The table above includes interest income on cash and cash equivalents
associated and not associated with the leverage strategy. Interest
income on cash and cash equivalents not related to the leverage strategy
decreased $155 thousand from the prior year six month period due to a
$98.9 million decrease in the average balance, partially offset by a 97
basis point increase in the weighted average yield which was related to
cash balances held at the FRB of Kansas City. Interest income on cash
associated with the leverage strategy decreased $12.4 million from the
prior year six month period due to a $1.80 billion decrease in the
average balance, as the leverage strategy was in place less often during
the current year six month period.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities
increased 17 basis points, from 1.32% for the prior year six month
period to 1.49% for the current year six month period, while the average
balance of interest-bearing liabilities decreased $1.58 billion 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 19 basis points, from 1.29% for the prior year six
month period to 1.48% for the current year six month period, and the
average balance of interest-bearing liabilities would have increased
$315.2 million. The following table presents the components of interest
expense for the time periods presented, along with the change measured
in dollars and percent.

      For the Six Months Ended            
March 31, Change Expressed in:
2019       2018 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits $ 31,821 $ 24,441 $ 7,380 30.2 %
FHLB borrowings 26,055 36,689 (10,634 ) (29.0 )
Other borrowings 1,684   2,025   (341 ) (16.8 )
Total interest expense $ 59,560   $ 63,155   $ (3,595 ) (5.7 )
 

The increase in interest expense on deposits was due primarily to a 22
basis point increase in the weighted average rate, to 1.15% for the
current year six month period. The deposit accounts assumed in the CCB
acquisition were at a lower average rate than our legacy deposit
portfolio rate and our overall deposit portfolio rate, which partially
offset the increase in the deposit portfolio rate in the current year
six month period. The increase in the weighted average rate was due
primarily to increases in the average retail/business certificate of
deposit portfolio rate and wholesale certificate of deposit portfolio
rate, which increased 28 basis points and 68 basis points, respectively.

The table above includes interest expense on FHLB borrowings associated
and not associated with the leverage strategy. Interest expense on FHLB
borrowings not related to the leverage strategy increased $2.5 million
from the prior year six month period due to a 19 basis point increase in
the weighted average rate paid on the portfolio, to 2.25% for the
current year six month period, and a $33.5 million increase in the
average balance of the portfolio. The increase in the weighted average
rate paid was due primarily to certain maturing advances being replaced
at higher effective interest rates. Interest expense on FHLB borrowings
associated with the leverage strategy decreased $13.1 million from the
prior year six month period due to the leverage strategy not being in
place as often during the current year six month period.

The decrease in interest expense on other borrowings was due mainly to
the maturity of a $100.0 million repurchase agreement during the prior
fiscal year, which was not replaced with a new repurchase agreement.

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.

      For the Six Months Ended            
March 31, Change Expressed in:
2019       2018 Dollars Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees $ 6,443 $ 7,635 $ (1,192 ) (15.6 )%
Income from BOLI 1,222 810 412 50.9
Other non-interest income 2,760   2,346   414   17.6  
Total non-interest income $ 10,425   $ 10,791   $ (366 ) (3.4 )
 

The decrease in deposit service fees was due mainly to a change in the
presentation of interchange network charges related to the adoption of a
new revenue recognition accounting standard during the current year six
month period. Previously, interchange network charges were reported in
deposit and loan expense. Upon adoption of the new revenue recognition
accounting standard on October 1, 2018, interchange transaction fee
income is reported net of interchange network charges, which totaled
$1.7 million during the current year six month period and $1.5 million
during the prior year six month period.

The increase in income from BOLI was due primarily to a one-time
adjustment during the prior year six month period to the benchmark rate
associated with one of the policies which reduced income from BOLI
during that period, as well as to an increase in income related to
policies acquired in the CCB acquisition.

The increase in other non-interest income was due mainly to revenues
from the trust asset management operations acquired from CCB.

Contacts

Kent Townsend
Executive Vice President,
Chief Financial
Officer and Treasurer
700 S Kansas Ave
Topeka, KS 66603
(785)
231-6360
ktownsend@capfed.com

Investor Relations
700 S Kansas Ave
Topeka, KS 66603
(785)
270-6055
investorrelations@capfed.com

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