Capitol Federal Financial, Inc.® Reports 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 fiscal year ended September 30, 2019. Detailed results will be available in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which will be filed with the Securities and Exchange Commission (“SEC”) on or about November 27, 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 $22.4 million;
  • basic and diluted earnings per share of $0.16;
  • net interest margin of 2.15% (2.24% excluding the effects of the leverage strategy); and
  • paid dividends of $11.7 million, or $0.085 per share.

Highlights for the fiscal year include:

  • net income of $94.2 million;
  • basic and diluted earnings per share of $0.68;
  • net interest margin of 2.26% (2.30% excluding the effects of the leverage strategy);
  • total commercial loans and commitments outstanding of $1.00 billion at September 30, 2019;
  • paid dividends of $134.9 million, or $0.98 per share; and
  • declared a fiscal year 2019 cash true-up dividend of $0.34 per share, payable on December 6, 2019.

Comparison of Operating Results for the Fiscal Years Ended September 30, 2019 and 2018

The Company recognized net income of $94.2 million, or $0.68 per share, for the fiscal year ended September 30, 2019 compared to net income of $98.9 million, or $0.73 per share, for the fiscal year ended September 30, 2018. The decrease in net income was due primarily to a $10.0 million increase in non-interest expense during the current year, partially offset by a $7.6 million increase in net interest income due primarily to higher yielding loans added in the acquisition of Capital City Bancshares, Inc. (“CCB”). Additionally, income tax expense was $1.4 million higher in the current fiscal year due primarily to income tax adjustments required in the prior fiscal year with the enactment of The Tax Cuts and Jobs Act (the “Tax Act”) in December 2017.

The net interest margin increased 31 basis points, from 1.95% for the prior fiscal year to 2.26% for the current fiscal year. 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 due to the negative interest rate spreads between the related Federal Home Loan Bank Topeka (“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 six basis points, from 2.24% for the prior fiscal year to 2.30% for the current fiscal year. 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, partially offset by an increase in the cost of deposits.

To the extent market rates of interest remain at current levels or go lower during fiscal year 2020, the Company expects a decrease in our net interest margin, compared to fiscal year 2019, 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 will likely do so at a slower pace than interest-earning assets because the majority of those liabilities have stated maturities.

Interest and Dividend Income

The weighted average yield on total interest-earning assets increased 45 basis points, from 3.16% for the prior fiscal year to 3.61% for the current fiscal year, while the average balance of interest-earning assets decreased $1.03 billion from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased 23 basis points, from 3.39% for the prior fiscal year to 3.62% for the current fiscal year, and the average balance of interest-earning assets would have increased $202.1 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 Year Ended

 

 

 

 

 

September 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

Loans receivable

$

284,229

 

 

$

260,198

 

 

$

24,031

 

 

9.2

%

MBS

25,730

 

 

22,619

 

 

3,111

 

 

13.8

 

FHLB stock

7,823

 

 

10,962

 

 

(3,139

)

 

(28.6

)

Investment securities

6,366

 

 

4,670

 

 

1,696

 

 

36.3

 

Cash and cash equivalents

5,806

 

 

23,443

 

 

(17,637

)

 

(75.2

)

Total interest and dividend income

$

329,954

 

 

$

321,892

 

 

$

8,062

 

 

2.5

 

The increase in interest income on loans receivable was due to a $282.0 million increase in the average balance of the portfolio, as well as a 17 basis point increase in the weighted average yield on the portfolio to 3.77% for the current fiscal year. 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 28 basis point increase in the weighted average yield on the portfolio to 2.63% for the current fiscal year, along with a $16.7 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 $1.3 million during the current fiscal year decreased the weighted average yield on the portfolio by 13 basis points. During the prior fiscal year, $3.0 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 31 basis points. As of September 30, 2019, the remaining net balance of premiums on our portfolio of MBS was $2.3 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 being in place for a shorter period of time during the current fiscal year as compared to the prior fiscal year. This was partially offset by a higher dividend rate on FHLB stock during the current fiscal year. See additional discussion regarding the leverage strategy in the Financial Condition section below.

The increase in interest income on the investment securities portfolio was due to a 66 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 cash and cash equivalents line item in the table above includes interest income associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy decreased $705 thousand from the prior fiscal year due to an $86.8 million decrease in the average balance, partially offset by a 68 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 $16.9 million from the prior fiscal year due to a $1.18 billion decrease in the average balance, as the leverage strategy was in place for a shorter period of time during the current fiscal year.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities increased 18 basis points, from 1.36% for the prior fiscal year to 1.54% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $973.3 million from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased 19 basis points, from 1.33% for the prior fiscal year to 1.52% for the current fiscal year, and the average balance of interest-bearing liabilities would have increased $263.2 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 Year Ended

 

 

 

 

 

September 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

$

66,201

 

 

$

52,625

 

 

$

13,576

 

 

25.8

%

FHLB borrowings

54,391

 

 

67,120

 

 

(12,729

)

 

(19.0

)

Other borrowings

2,972

 

 

3,374

 

 

(402

)

 

(11.9

)

Total interest expense

$

123,564

 

 

$

123,119

 

 

$

445

 

 

0.4

 

The increase in interest expense on deposits was due primarily to a 20 basis point increase in the weighted average rate, to 1.19% for the current fiscal year. 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 fiscal year. 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 29 basis points and 33 basis points, respectively, as market interest rates increased throughout both years. Additionally, late in the third quarter of fiscal year 2019, the Bank 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 and during the fourth quarter of fiscal year 2019 the Bank held a special certificate of deposit campaign (“unTraditional campaign”) resulting in growth in the short-term and certain intermediate-term certificates of deposit. See the Financial Condition section below for more information.

The FHLB borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy increased $5.5 million from the prior fiscal year due to a 23 basis point increase in the weighted average rate paid, to 2.30% for the current fiscal year, and a $14.0 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 $18.2 million from the prior fiscal year due to the leverage strategy being in place for a shorter period of time during the current fiscal year.

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 fiscal year of $750 thousand, compared to no provision for credit losses during the prior fiscal year. The $750 thousand provision for credit losses in the current fiscal year is due primarily to commercial loan activities during the current fiscal year, specifically the classification of a large commercial loan as special mention, commercial loan growth and funding, certain commercial loans that renewed since being obtained in the CCB acquisition and are now in the Bank’s allowance for credit losses (“ACL”) model, and commercial loan charge-offs.

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 Year Ended

 

 

 

 

 

September 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

Deposit service fees

$

12,740

 

 

$

15,636

 

 

$

(2,896

)

 

(18.5

)%

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

2,432

 

 

1,875

 

 

557

 

 

29.7

 

Other non-interest income

6,786

 

 

4,524

 

 

2,262

 

 

50.0

 

Total non-interest income

$

21,958

 

 

$

22,035

 

 

$

(77

)

 

(0.3

)

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 fiscal year. Previously, interchange network charges were reported in deposit and loan expense. As a result of the adoption of the new revenue recognition accounting standard on October 1, 2018, interchange transaction fee income is now reported net of interchange network charges, which totaled $3.4 million during the current fiscal year and $3.0 million during the prior fiscal year.

The increase in income from BOLI was due primarily to a one-time adjustment during the prior fiscal year 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 obtained in the CCB acquisition, commercial loan fee related income, insurance commission income, and income related to the collateral pledged by the Bank on its interest rate swap agreements.

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 Year Ended

 

 

 

 

 

September 30,

 

Change Expressed in:

 

2019

 

2018

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

$

53,145

 

 

$

46,563

 

 

$

6,582

 

 

14.1

%

Information technology and related expense

17,615

 

 

13,999

 

 

3,616

 

 

25.8

 

Occupancy, net

13,032

 

 

11,455

 

 

1,577

 

 

13.8

 

Regulatory and outside services

5,813

 

 

5,709

 

 

104

 

 

1.8

 

Advertising and promotional

5,244

 

 

5,034

 

 

210

 

 

4.2

 

Deposit and loan transaction costs

2,478

 

 

5,621

 

 

(3,143

)

 

(55.9

)

Office supplies and related expense

2,439

 

 

1,888

 

 

551

 

 

29.2

 

Federal insurance premium

1,172

 

 

3,277

 

 

(2,105

)

 

(64.2

)

Other non-interest expense

6,006

 

 

3,356

 

 

2,650

 

 

79.0

 

Total non-interest expense

$

106,944

 

 

$

96,902

 

 

$

10,042

 

 

10.4

 

The increase in salaries and employee benefits was due primarily to expense related to retained CCB employees. Management anticipates salaries and employee benefits will be approximately $4.0 million higher in fiscal year 2020 due primarily to an increase in staffing for commercial banking activities and related back office functions, along with an increase in information technology staff. The $4.0 million increase is expected to be approximately $1.2 million in each of the second and third quarters and $1.6 million in the fourth quarter. 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. The increase in occupancy, net was due primarily to expenses related to properties acquired in the CCB acquisition. The decrease in deposit and loan transaction costs was due mainly to the adoption of the new revenue recognition standard discussed above. The increase in office supplies and related expense was due primarily to costs related to the integration of CCB customers and operations. The decrease in the federal insurance premium was due mainly to the Bank receiving a credit from the Federal Deposit Insurance Corporation (“FDIC”) as a result of the FDIC deposit insurance fund ratio reaching 1.40%. Pursuant to regulatory guidance, once the insurance fund exceeds 1.38% of insured deposits, deposit insurance assessment credits are allocated to banks with less than $10 billion in assets, to compensate for premiums previously paid that contributed to growth of the fund past 1.15%. These credits will continue to offset the Bank’s premium assessments as long as the insurance fund ratio remains above 1.38% of insured deposits and the Bank still has a remaining credit balance. As of September 30, 2019, the Bank had a remaining credit of $1.6 million. The increase in other non-interest expense was due primarily to amortization of deposit intangibles associated with the acquisition of CCB. Management anticipates other non-interest expense may increase in the first quarter of fiscal year 2020 due primarily to a potential $400 thousand write-down of an OREO property that was added in the CCB acquisition, related to an offer received on this property subsequent to September 30, 2019.

The Company’s efficiency ratio was 46.83% for the current fiscal year compared to 43.89% for the prior fiscal year. The change in the efficiency ratio was due to higher non-interest expense in the current fiscal year compared to the prior fiscal year. 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 $26.4 million for the current fiscal year compared to $25.0 million for the prior fiscal year. The effective tax rate was 21.9% for the current fiscal year compared to 20.2% for the prior fiscal year. The increase in the effective tax rate compared to the prior year was due mainly to the enactment of the Tax Act in the prior fiscal year. 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 tax rate which reduced income tax expense by $7.5 million. This benefit was partially offset, when comparing the two fiscal years, as the Company was required to apply a blended statutory federal tax rate, because we have a fiscal year end of September 30, of 24.5% in the prior fiscal year compared to 21% in the current fiscal year. Additionally, the tax credit benefits associated with the Company’s low income housing partnership investments were higher in the current fiscal year compared to the prior fiscal year, which contributed to a reduction in the current year effective income tax compared to the prior fiscal year. Management anticipates the effective income tax rate for fiscal year 2020 will be approximately 21% to 22%.

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

For the quarter ended September 30, 2019, the Company recognized net income of $22.4 million, or $0.16 per share, compared to net income of $22.9 million, or $0.17 per share, for the quarter ended June 30, 2019. The decrease in net income was due primarily to a decrease in net interest income, partially offset by a decrease in non-interest expense.

Net interest income decreased $1.9 million, or 3.6%, from the prior quarter to $49.8 million for the current quarter. The net interest margin decreased 14 basis points from 2.29% for the prior quarter to 2.15% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have decreased five basis points, from 2.29% for the prior quarter to 2.24% for the current quarter. The leverage strategy was in place during a portion of the current quarter, and was not in place during the prior quarter. 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 decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit and a decrease in interest income on loans receivable, partially offset by a decrease in the cost of public unit certificates of deposit.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased six basis points, from 3.64% for the prior quarter to 3.58% for the current quarter, while the average balance of interest-earning assets increased $253.1 million between the two periods. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased two basis points, from 3.64% for the prior quarter to 3.62% for the current quarter, and the average balance of interest-earning assets would have decreased $144.8 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

 

 

 

 

 

September 30,

 

June 30,

 

Change Expressed in:

 

2019

 

2019

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

Loans receivable

$

70,366

 

 

$

71,434

 

 

$

(1,068

)

 

(1.5

)%

MBS

6,293

 

 

6,613

 

 

(320

)

 

(4.8

)

FHLB stock

2,156

 

 

1,865

 

 

291

 

 

15.6

 

Investment securities

1,585

 

 

1,835

 

 

(250

)

 

(13.6

)

Cash and cash equivalents

2,885

 

 

464

 

 

2,421

 

 

521.8

 

Total interest and dividend income

$

83,285

 

 

$

82,211

 

 

$

1,074

 

 

1.3

 

The decrease in interest income on loans receivable was due primarily to an increase in premium amortization on one- to four-family correspondent loans as a result of payoff activity. The decrease in interest income on the MBS portfolio was due to a $59.2 million decrease in the average balance of the portfolio. The increase in interest income on FHLB stock and cash and cash equivalents was due mainly to the leverage strategy being in place during a portion of current quarter. The decrease in interest income on investment securities was due mainly to a 26 basis point decrease in the average yield on the portfolio resulting primarily from discount accretion on securities called during the prior quarter.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities for the current quarter increased eight basis points, from 1.54% for the prior quarter to 1.62% for the current quarter, and the average balance of interest-bearing liabilities increased $266.0 million between the two periods. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased three basis points, from 1.54% for the prior quarter to 1.57% for the current quarter, while the average balance of interest-bearing liabilities would have decreased $131.8 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

 

For the Three Months Ended

 

 

 

 

 

September 30,

 

June 30,

 

Change Expressed in:

 

2019

 

2019

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

$

17,471

 

 

$

16,909

 

 

$

562

 

 

3.3

%

FHLB borrowings

15,355

 

 

12,981

 

 

2,374

 

 

18.3

 

Other borrowings

648

 

 

640

 

 

8

 

 

1.3

 

Total interest expense

$

33,474

 

 

$

30,530

 

 

$

2,944

 

 

9.6

 

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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