Capitol Federal Financial, Inc.® Reports Third 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 June 30, 2019. Detailed results will be available in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which will be filed with the Securities and Exchange Commission (“SEC”) on or about August 9, 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 $22.9 million;
  • basic and diluted earnings per share of $0.17;
  • net interest margin of 2.29%;
  • paid dividends of $46.2 million, or $0.335 per share, including a $0.25 per share True Blue® Capitol dividend; and
  • total commercial loans and commitments outstanding of $1.01 billion at quarter-end.

Comparison of Operating Results for the Three Months Ended June 30, 2019 and March 31, 2019

For the quarter ended June 30, 2019, the Company recognized net income of $22.9 million, or $0.17 per share, compared to net income of $24.6 million, or $0.18 per share, for the quarter ended March 31, 2019. The decrease in net income was due primarily to an increase in non-interest expense and interest expense, partially offset by an increase in non-interest income and lower income tax expense.

Net interest income decreased $916 thousand, or 1.7%, from the prior quarter to $51.7 million for the current quarter. The leverage strategy was not in place during the current quarter or the prior quarter. The net interest margin decreased four basis points from 2.33% for the prior quarter to 2.29% for the current quarter. The decrease in the net interest margin was due mainly to an increase in the cost of deposits, primarily retail/business certificates of deposit.

To the extent market rates of interest remain at current levels or go lower during the quarter ending September 30, 2019, the Company expects a decrease in our net interest margin due primarily to lower yields on our loans and securities. If realized, the decrease in the yields on our loans and securities is expected to be from loans originated at lower rates, adjustable-rate loans repricing lower and increased prepayment speeds on our correspondent loans and mortgage-backed securities (“MBS”) portfolios, which would accelerate the amortization of the premiums we have paid to acquire these assets. The rates on our certificate of deposit portfolio and borrowings may also decrease if market rates decrease, but likely at a slower pace than interest-earning assets because the majority of those liabilities have stated maturities. It is anticipated that our non-interest income and non-interest expense will remain consistent with prior periods in the upcoming quarter.

Interest and Dividend Income

The weighted average yield on total interest-earning assets for the current quarter was 3.64%, unchanged from the prior quarter, while the average balance of interest-earning assets decreased $646 thousand between the two periods. 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

 

 

 

 

 

June 30,

 

March 31,

 

Change Expressed in:

 

2019

 

2019

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

Loans receivable

$

 

71,434

 

 

$

 

71,657

 

 

$

 

(223

)

 

(0.3

)%

MBS

 

6,613

 

 

 

6,301

 

 

 

312

 

 

5.0

 

Federal Home Loan Bank Topeka (“FHLB”) stock

 

1,865

 

 

 

1,831

 

 

 

34

 

 

1.9

 

Investment securities

 

1,835

 

 

 

1,505

 

 

 

330

 

 

21.9

 

Cash and cash equivalents

 

464

 

 

 

743

 

 

 

(279

)

 

(37.6

)

Total interest and dividend income

$

 

82,211

 

 

$

 

82,037

 

 

$

 

174

 

 

0.2

 

The decrease in interest income on loans receivable was due primarily to a decrease in interest income on one- to four-family loans, largely offset by an increase in interest income on commercial loans. The increase in interest income on the MBS portfolio was due primarily to a $41.7 million increase in the average balance of the portfolio. The increase in interest income on investment securities was due mainly to a 31 basis point increase in the average yield on the portfolio resulting primarily from discount accretion on securities called during the quarter, along with an $18.5 million increase in the average balance of the portfolio. The decrease in interest income on cash and cash equivalents was due to a $46.8 million decrease in the average balance, as excess operating cash was invested in MBS and investment securities during the current quarter.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities for the current quarter increased three basis points, from 1.51% for the prior quarter to 1.54% for the current quarter, while the average balance of interest-bearing liabilities decreased $796 thousand between the two periods. 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

 

 

 

 

 

June 30,

 

March 31,

 

Change Expressed in:

 

2019

 

2019

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

$

 

16,909

 

 

$

 

16,096

 

 

$

 

813

 

 

5.1

%

FHLB borrowings

 

12,981

 

 

 

12,525

 

 

 

456

 

 

3.6

 

Other borrowings

 

640

 

 

 

819

 

 

 

(179

)

 

(21.9

)

Total interest expense

$

 

30,530

 

 

$

 

29,440

 

 

$

 

1,090

 

 

3.7

 

The increase in interest expense on deposits was due primarily to a five basis point increase in the weighted average rate paid, to 1.21% for the current quarter. The increase in the weighted average rate paid was due primarily to an eight basis point increase in the average retail/business certificate of deposit portfolio rate.

The increase in interest expense on FHLB borrowings was due to a five basis point increase in the weighted average rate paid, to 2.35% for the current quarter. The increase in the weighted average rate paid was due mainly to the maturity of a $100 million advance that had a rate lower than the overall portfolio rate.

The decrease in interest expense on other borrowings was due to a decrease in the average balance as a result of the redemption of the junior subordinated debentures that were assumed as part of the acquisition of Capital City Bancshares, Inc. (“CCB”).

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current quarter of $450 thousand, compared to no provision for credit losses during the prior quarter. The $450 thousand provision for credit losses in the current quarter was primarily a result of commercial loan activities. See additional allowance for credit losses (“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

 

 

 

 

 

June 30,

 

March 31,

 

Change Expressed in:

 

2019

 

2019

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

Deposit service fees

$

 

3,131

 

 

$

 

3,091

 

 

$

 

40

 

 

1.3

%

Income from bank-owned life insurance (“BOLI”)

 

590

 

 

 

587

 

 

 

3

 

 

0.5

 

Other non-interest income

 

1,953

 

 

 

1,323

 

 

 

630

 

 

47.6

 

Total non-interest income

$

 

5,674

 

 

$

 

5,001

 

 

$

 

673

 

 

13.5

 

The increase in other non-interest income was due primarily to an increase in insurance commissions resulting from the receipt of annual commissions and the related adjustments to accruals, along with miscellaneous loan related income.

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

 

 

 

 

 

June 30,

 

March 31,

 

Change Expressed in:

 

2019

 

2019

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

$

 

13,454

 

 

$

 

12,789

 

 

$

 

665

 

 

5.2

%

Information technology and related expense

 

4,652

 

 

 

4,284

 

 

 

368

 

 

8.6

 

Occupancy, net

 

3,224

 

 

 

3,292

 

 

 

(68

)

 

(2.1

)

Regulatory and outside services

 

1,425

 

 

 

1,056

 

 

 

369

 

 

34.9

 

Advertising and promotional

 

1,447

 

 

 

1,390

 

 

 

57

 

 

4.1

 

Office supplies and related expense

 

689

 

 

 

736

 

 

 

(47

)

 

(6.4

)

Deposit and loan transaction costs

 

681

 

 

 

465

 

 

 

216

 

 

46.5

 

Federal insurance premium

 

600

 

 

 

659

 

 

 

(59

)

 

(9.0

)

Other non-interest expense

 

1,519

 

 

 

1,470

 

 

 

49

 

 

3.3

 

Total non-interest expense

$

 

27,691

 

 

$

 

26,141

 

 

$

 

1,550

 

 

5.9

 

The increase in salaries and employee benefits expense was due mainly to additional expense on unallocated Employee Stock Ownership Plan (“ESOP”) shares arising from the $0.25 per share True Blue Capitol dividend paid on those shares in June 2019. The expense recognized in the current quarter was $453 thousand, and it is expected that $453 thousand will also be recognized during the quarter ending September 30, 2019. The increase in information technology and related expense was due primarily to costs related to the integration of CCB operations. The increase in regulatory and outside services was due mainly to the timing of external audit billings. The increase in deposit and loan transaction costs was due mainly to loan-related activities and debit card expenses related to the CCB integration.

The Company’s efficiency ratio was 48.28% for the current quarter compared to 45.38% for the prior quarter. The increase in the efficiency ratio was due primarily to higher 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 $6.3 million for the current quarter, compared to $6.9 million for the prior quarter. The effective tax rate was 21.6% for the current quarter compared to 21.9% 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 Nine Months Ended June 30, 2019 and 2018

The Company recognized net income of $71.8 million, or $0.52 per share, for the nine month period ended June 30, 2019 compared to net income of $77.5 million, or $0.58 per share, for the nine month period ended June 30, 2018. The decrease in net income was due primarily to an increase in non-interest expense during the current year nine month period, as well as the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) positively impacting the prior year nine month period as discussed below. 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, which reduced income tax expense.

The net interest margin increased 43 basis points, from 1.87% for the prior year nine month period to 2.30% for the current year nine 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 nine month period due to the negative interest rate spreads between the related FHLB borrowings and cash held at the Federal Reserve Bank of Kansas City (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 nine basis points, from 2.23% for the prior year nine month period to 2.32% for the current year nine 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 53 basis points, from 3.08% for the prior year nine month period to 3.61% for the current year nine month period, while the average balance of interest-earning assets decreased $1.50 billion from the prior year nine month period. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased 27 basis points, from 3.35% for the prior year nine month period to 3.62% for the current year nine month period, and the average balance of interest-earning assets would have increased $263.7 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 Nine Months Ended

 

 

 

 

 

June 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

Loans receivable

$

 

213,863

 

 

$

 

193,276

 

 

$

 

20,587

 

 

10.7

%

MBS

 

19,437

 

 

 

16,563

 

 

 

2,874

 

 

17.4

 

FHLB stock

 

5,667

 

 

 

9,115

 

 

 

(3,448

)

 

(37.8

)

Investment securities

 

4,781

 

 

 

3,395

 

 

 

1,386

 

 

40.8

 

Cash and cash equivalents

 

2,921

 

 

 

22,230

 

 

 

(19,309

)

 

(86.9

)

Total interest and dividend income

$

 

246,669

 

 

$

 

244,579

 

 

$

 

2,090

 

 

0.9

 

The increase in interest income on loans receivable was due to a $337.9 million increase in the average balance of the portfolio, as well as a 21 basis point increase in the weighted average yield on the portfolio to 3.78% for the current year nine 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, legacy 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 30 basis point increase in the weighted average yield on the portfolio to 2.62% for the current year nine month period, along with a $37.7 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 $1.0 million during the current year nine month period decreased the weighted average yield on the portfolio by 14 basis points. During the prior year nine month period, $2.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 33 basis points. As of June 30, 2019, the remaining net balance of premiums on our portfolio of MBS was $2.5 million.

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 nine month period as compared to the prior year nine month period. This was partially offset by a higher dividend rate on FHLB stock during the current year nine 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 2.26%. 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 $420 thousand from the prior year nine month period due to a $94.3 million decrease in the average balance, partially offset by an 86 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 $18.9 million from the prior year nine month period due to a $1.68 billion decrease in the average balance, as the leverage strategy was in place less often during the current year nine month period. 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 increased 15 basis points, from 1.36% for the prior year nine month period to 1.51% for the current year nine month period, while the average balance of interest-bearing liabilities decreased $1.44 billion from the prior year nine 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 1.31% for the prior year nine month period to 1.50% for the current year nine month period, and the average balance of interest-bearing liabilities would have increased $316.7 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 Nine Months Ended

 

 

 

 

 

June 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

$

 

48,730

 

 

$

 

38,028

 

 

$

 

10,702

 

 

28.1

%

FHLB borrowings

 

39,036

 

 

 

55,190

 

 

 

(16,154

)

 

(29.3

)

Other borrowings

 

2,324

 

 

 

2,665

 

 

 

(341

)

 

(12.8

)

Total interest expense

$

 

90,090

 

 

$

 

95,883

 

 

$

 

(5,793

)

 

(6.0

)

The increase in interest expense on deposits was due primarily to a 21 basis point increase in the weighted average rate, to 1.17% for the current year nine 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 nine 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 money market portfolio rate, which increased 28 basis points and 36 basis points, respectively, as market interest rates increased between periods. Additionally, the Bank recently increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms. See the Financial Condition section below for more information.

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 $4.2 million from the prior year nine month period due to a 23 basis point increase in the weighted average rate paid on the portfolio, to 2.29% for the current year nine month period, and a $30.9 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 market interest rates. Interest expense on FHLB borrowings associated with the leverage strategy decreased $20.4 million from the prior year nine month period due to the leverage strategy not being in place as often during the current year nine 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.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current year nine month period of $450 thousand, compared to no provision for credit losses during the prior year nine month period. The $450 thousand provision for credit losses in the current year nine month period is primarily a result of commercial loan activities during the current quarter. 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 Nine Months Ended

 

 

 

 

 

June 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

Deposit service fees

$

 

9,581

 

 

$

 

11,550

 

 

$

 

(1,969

)

 

(17.0

)%

Income from BOLI

 

1,812

 

 

 

1,320

 

 

 

492

 

 

37.3

 

Other non-interest income

 

4,706

 

 

 

3,345

 

 

 

1,361

 

 

40.7

 

Total non-interest income

$

 

16,099

 

 

$

 

16,215

 

 

$

 

(116

)

 

(0.7

)

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 nine 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 $2.5 million during the current year nine month period and $2.2 million during the prior year nine month period.

The increase in income from BOLI was due primarily to a one-time adjustment during the prior year nine 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, loan related income mainly related to the CCB acquisition, and insurance commission income. Additionally, the prior year nine month period included a loss on the sale of loans as management tested loan sale processes for liquidity purposes, and there were no loan sales in the current year nine 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.

 

For the Nine Months Ended

 

 

 

 

 

June 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

$

 

39,205

 

 

$

 

33,631

 

 

$

 

5,574

 

 

16.6

%

Information technology and related expense

 

13,535

 

 

 

10,316

 

 

 

3,219

 

 

31.2

 

Occupancy, net

 

9,768

 

 

 

8,391

 

 

 

1,377

 

 

16.4

 

Regulatory and outside services

 

4,247

 

 

 

3,919

 

 

 

328

 

 

8.4

 

Advertising and promotional

 

3,597

 

 

 

3,512

 

 

 

85

 

 

2.4

 

Office supplies and related expense

 

1,884

 

 

 

1,339

 

 

 

545

 

 

40.7

 

Deposit and loan transaction costs

 

1,882

 

 

 

4,157

 

 

 

(2,275

)

 

(54.7

)

Federal insurance premium

 

1,787

 

 

 

2,512

 

 

 

(725

)

 

(28.9

)

Other non-interest expense

 

4,709

 

 

 

2,368

 

 

 

2,341

 

 

98.9

 

Total non-interest expense

$

 

80,614

 

 

$

 

70,145

 

 

$

 

10,469

 

 

14.9

 

The increase in salaries and employee benefits was due primarily to $4.8 million of expense related to former CCB employees during the current year nine month period. The increase in information technology and related expense was due mainly to an increase in software licensing and costs related to the integration of CCB operations.

Contacts

Kent Townsend

Executive Vice President, Chief Financial Officer and Treasurer

(785) 231-6360

ktownsend@capfed.com

Investor Relations

(785) 270-6055

investorrelations@capfed.com

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