Capitol Federal Financial, Inc. Reports First Quarter 2013 Results

TOPEKA, Kan., Jan. 29, 2013 /PRNewswire/ -- Capitol Federal Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the quarter ended December 31, 2012.  Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2012, which will be filed with the Securities and Exchange Commission ("SEC") on or about February 4, 2013 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 $17.6 million,
  • basic and diluted earnings per average share outstanding of $0.12,
  • net interest margin of 2.01%,
  • repurchased 3,263,882 shares of common stock at an average price of $11.84 per share, and
  • paid a special True Blue® dividend of $0.52 per share.

Comparison of Operating Results for the Quarters Ended December 31, 2012 and September 30, 2012

Net income decreased $173 thousand, or 1.0%, from $17.7 million for the quarter ended September 30, 2012 to $17.6 million for the quarter ended December 31, 2012.  The net interest margin remained unchanged at 2.01% for both the current and prior quarters as the decrease in asset yields continued to be substantially offset by a decrease in the cost of liabilities.  Additionally, the current quarter includes the full impact of the $342.5 million bulk loan purchase that occurred during the quarter ended September 30, 2012.  The weighted average rate of the loan portfolio purchased was 2.48% at the time of purchase, which was higher than the yield available on similar duration securities.  The loan purchase was primarily funded with cash flows from the securities portfolio.

Interest and Dividend Income

The decrease in interest and dividend income was primarily a result of decreases in interest income on mortgage-backed securities ("MBS") and investment securities, partially offset by an increase in interest income on loans receivable.  The weighted average yield on total interest-earning assets decreased five basis points between quarters, from 3.47% for the prior quarter to 3.42% for the current quarter.  The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.

 














For the Three Months Ended








December 31,


September 30,


Change Expressed in:


2012


2012


Dollars


Percent


(Dollars in thousands)



INTEREST AND DIVIDEND INCOME:











Loans receivable

$

58,467


$

58,218


$

249


0.4%

MBS


15,183



16,470



(1,287)


(7.8)

Investment securities


2,865



3,409



(544)


(16.0)

Capital stock of Federal Home Loan Bank ("FHLB")


1,128



1,133



(5)


(0.4)

Cash and cash equivalents


33



75



(42)


(56.0)

Total interest and dividend income

$

77,676


$

79,305


$

(1,629)


(2.1)%

The increase in interest income on loans receivable was due to a $235.1 million increase in the average balance of the portfolio which was primarily a result of the $342.5 million bulk loan purchase discussed above, partially offset by a 16 basis point decrease in the average yield of the portfolio to 4.16% for the current quarter.  The decrease in interest income on MBS was due primarily to a 14 basis point decrease in the average yield of the portfolio, from 2.74% for the prior quarter to 2.60% for the current quarter, and partially due to a $64.6 million decrease in the average balance of the portfolio.  The decrease in the average yield of the portfolio was due primarily to purchases of MBS during the quarter with yields less than the average yield on the existing portfolio.  The decrease in interest income on investment securities was due primarily to a $164.4 million decrease in the average balance of the portfolio.

Interest Expense

The decrease in interest expense between periods was due to decreases in interest expense on FHLB advances and deposits.  The weighted average rate on total interest-bearing liabilities decreased eight basis points between quarters, from 1.79% for the prior quarter to 1.71% for the current quarter.  The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent.














For the Three Months Ended








December 31,


September 30,


Change Expressed in:


2012


2012


Dollars


Percent


(Dollars in thousands)



INTEREST EXPENSE:











FHLB advances

$

18,628


$

19,403


$

(775)


(4.0)%

Deposits


9,849



10,480



(631)


(6.0)

Repurchase agreements


3,569



3,569



--


--

Total interest expense

$

32,046


$

33,452


$

(1,406)


(4.2)%

The decrease in interest expense on FHLB advances and deposits was due primarily to a decrease in the weighted average rate paid on the portfolios.  The weighted average rate paid on FHLB advances decreased 13 basis points, from 3.05% for the prior quarter to 2.92% for the current quarter.  During the current quarter, a $100 million advance with an effective rate of 4.85% matured and was renewed for a term of four years at a contractual rate of 0.78%.  The weighted average rate paid on deposits decreased six basis points, from 0.92% for the prior quarter to 0.86% for the current quarter, as the portfolio continued to reprice to lower market rates.

Provision for Credit Losses

The provision for credit losses for the current quarter was $233 thousand, compared to no provision during the prior quarter.  The current quarter amount represents the amount necessary to maintain the allowance for credit losses ("ACL") at a level considered appropriate by management.  Net charge-offs during the current quarter were $856 thousand compared to $677 thousand in the prior quarter.  Of the $856 thousand of net charge-offs during the current quarter, $369 thousand related to loans that were previously discharged under Chapter 7 bankruptcy that must be, in accordance with Office of Comptroller of Currency ("OCC") regulations, evaluated for collateral value loss, even if they are current.  The overall performance of our loan portfolio continued to improve during the current quarter as evidenced by the decline in our loans 90 or more days delinquent or in foreclosure.  Loans 90 or more days delinquent or in foreclosure decreased $429 thousand, or 2.2%, from $19.5 million at September 30, 2012 to $19.0 million at December 31, 2012.

Other Expense

The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.














For the Three Months Ended








December 31,


September 30,


Change Expressed in:



2012


2012


Dollars


Percent



(Dollars in thousands)




OTHER EXPENSES:












Salaries and employee benefits

$

12,181


$

11,545


$

636


5.5%


Occupancy expense


2,318



2,359



(41)


(1.7)


Information technology and communications


2,198



2,048



150


7.3


Regulatory and outside services


1,765



1,595



170


10.7


Deposit and loan transaction costs


1,526



1,519



7


0.5


Federal insurance premium


1,114



1,135



(21)


(1.9)


Advertising and promotional


1,032



1,257



(225)


(17.9)


Other expenses, net


2,607



2,676



(69)


(2.6)


Total other expenses

$

24,741


$

24,134


$

607


2.5%


The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated Employee Stock Ownership Plan ("ESOP") shares related to the $0.52 True Blue® dividend paid in December 2012.  Other real estate owned ("OREO") operations expense, which is a component of other expenses, net, was $670 thousand for the current quarter, compared to $826 thousand for the prior quarter.  Over the past 12 months, OREO properties were owned by Capitol Federal Savings Bank (the "Bank"), on average, for approximately five months before they were sold. 

We currently anticipate the following increases in other expenses during fiscal year 2013, as compared to fiscal year 2012:  (1) a $4.4 million increase in salaries and employee benefits due to an estimated $2.7 million increase in additional compensation expense on unallocated ESOP shares as a result of the True Blue® and special year-end dividends paid and a full year's impact of equity plan awards made in May 2012 and September 2012; (2) a $1.8 million increase in information technology and communications expense and occupancy expense as a result of an increase in licensing and maintenance expenses related to upgrades to our information technology infrastructure and an increase in depreciation expense associated with the remodel of our Home Office; and (3) a $600 thousand increase in advertising expense, which is due primarily to media campaigns that were delayed until fiscal year 2013.

Income Tax Expense

Income tax expense was $8.9 million for the current quarter compared to $9.8 million for the prior quarter.  The effective income tax rate for the current quarter was 33.5% compared to 35.6% for the prior quarter.  Management anticipates the effective tax rate for fiscal year 2013 will be approximately 34%, based on fiscal year 2013 estimates as of December 31, 2012.  This rate is lower than the prior year rate of 35.8% due primarily to (1) higher deductible expenses associated with the ESOP, and (2) anticipated higher tax credits related to our low income housing partnerships.  Additionally, pre-tax income is anticipated to be lower than the prior year, due primarily to the items outlined above in other expenses, which results in all items impacting the income tax rate to have a larger impact on the overall effective tax rate than in fiscal year 2012.

Comparison of Operating Results for the Quarters Ended December 31, 2012 and 2011

For the quarter ended December 31, 2012, the Company recognized net income of $17.6 million, compared to net income of $18.8 million for the quarter ended December 31, 2011.  The $1.2 million, or 6.5%, decrease in net income was due primarily to an increase in other expenses, partially offset by a decrease in income tax expense.

The net interest margin increased three basis points, from 1.98% for the prior year quarter to 2.01% for the current quarter, primarily as a result of a decrease in the cost of funds between the two periods.  The weighted average yield on total interest-earning assets decreased 28 basis points from the prior year quarter to 3.42% for the current quarter.  The weighted average rate paid on total interest-bearing liabilities decreased 42 basis points from the prior year quarter to 1.71% for the current quarter.

Interest and Dividend Income

The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.













For the Three Months Ended







December 31,


Change Expressed in:


2012


2011


Dollars


Percent


(Dollars in thousands)



INTEREST AND DIVIDEND INCOME:











Loans receivable

$

58,467


$

60,675


$

(2,208)


(3.6)%

MBS


15,183



18,373



(3,190)


(17.4)

Investment securities


2,865



4,637



(1,772)


(38.2)

Capital stock of FHLB


1,128



1,091



37


3.4

Cash and cash equivalents


33



51



(18)


(35.3)%

Total interest and dividend income

$

77,676


$

84,827


$

(7,151)


(8.4)

The decrease in interest income on loans receivable and MBS was due primarily to a decrease in the weighted average yield of each respective portfolio.  The average yield on the loans receivable portfolio decreased 51 basis points, from 4.67% for the prior year quarter to 4.16% for the current quarter, primarily a result of loan endorsements and refinances, along with originations and purchases between periods at rates less than the average rate of the existing loan portfolio.  The decrease in interest income on loans receivable resulting from the decrease in the average yield was partially offset by a $432.8 million increase in the average balance of the portfolio, which was primarily a result of a $342.5 million bulk loan purchase during the quarter ended September 30, 2012.  The average yield on the MBS portfolio decreased 49 basis points, from 3.09% during the prior year quarter to 2.60% for the current quarter.  The decrease in the average yield was due primarily to purchases of MBS between periods with yields less than the average yield on the existing portfolio.  The decrease in interest income on investment securities was due primarily to a $458.0 million decrease in the average balance of the portfolio as a result of cash flows from calls and maturities not being replaced in their entirety; rather, the proceeds were used primarily to fund loan activity, repurchase stock, and pay dividends to stockholders.

Interest Expense

The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent.













For the Three Months Ended







December 31,


Change Expressed in:


2012


2011


Dollars


Percent


(Dollars in thousands)



INTEREST EXPENSE:











FHLB advances

$

18,628


$

22,339


$

(3,711)


(16.6)%

Deposits


9,849



12,787



(2,938)


(23.0)

Repurchase agreements


3,569



4,327



(758)


(17.5)

Total interest expense

$

32,046


$

39,453


$

(7,407)


(18.8)%

The decrease in interest expense on FHLB advances was due to a 70 basis point decrease in the weighted average rate of the portfolio, from 3.62% for the prior year quarter to 2.92% for the current quarter.  The decrease in the average rate paid was due to the renewal and prepayment of advances between periods to lower rates.  The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate of the portfolio, most notably on the certificate of deposit portfolio, which decreased 36 basis points, from 1.77% for the prior year quarter to 1.41% for the current quarter, as the portfolio repriced to lower market rates between periods.  The weighted average rate paid on total deposits decreased 28 basis points, from 1.14% for the prior year quarter to 0.86% for the current quarter.  The decrease in interest expense on repurchase agreements was due to a $69.0 million decrease in the average balance between periods as a result of maturing agreements not being renewed; rather, they were replaced with FHLB advances.

Provision for Credit Losses

The provision for credit losses for the current quarter was $233 thousand, compared to $540 thousand for the prior year quarter.  The current quarter amount represents the amount necessary to maintain the ACL at a level considered appropriate by management.  Net charge-offs during the current quarter were $856 thousand, of which $369 thousand related to loans that were previously discharged under Chapter 7 bankruptcy that must be, in accordance with OCC regulations, evaluated for collateral value loss, even if they are current.  The overall performance of our loan portfolio continued to improve between periods as evidenced by the decline in our loans 90 or more days delinquent or in foreclosure.  Loans 90 or more days delinquent or in foreclosure decreased $9.4 million, or 33.1%, from $28.4 million at December 31, 2011 to $19.0 million at December 31, 2012. 

Other Expense

The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.













For the Three Months Ended







December 31,


Change Expressed in:


2012


2011


Dollars


Percent


(Dollars in thousands)



OTHER EXPENSES:











Salaries and employee benefits

$

12,181


$

10,587


$

1,594


15.1%

Occupancy expense


2,318



2,079



239


11.5

Information technology and communications


2,198



1,830



368


20.1

Regulatory and outside services


1,765



1,435



330


23.0

Deposit and loan transaction costs


1,526



1,230



296


24.1

Federal insurance premium


1,114



1,092



22


2.0

Advertising and promotional


1,032



910



122


13.4

Other expenses, net


2,607



2,904



(297)


(10.2)

Total other expenses

$

24,741


$

22,067


$

2,674


12.1%

The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated ESOP shares related to the $0.52 True Blue® dividend paid in December 2012 and compensation expense associated with stock options and restricted stock grants in May 2012 and September 2012. 

Income Tax Expense

Income tax expense was $8.9 million for the current quarter compared to $10.1 million for the prior year quarter.  The decrease in expense between periods was due primarily to a decrease in pretax income.  The effective tax rate for the current quarter was 33.5% compared to 35.0% for the prior year quarter.  See discussion above regarding management's expectations of the effective tax rate for fiscal year 2013.

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Dollars in thousands)

 


For the Three Months Ended


December 31,


September 30,


December 31,


2012


2012


2011

INTEREST AND DIVIDEND INCOME:









Loans receivable

$

58,467


$

58,218


$

60,675

MBS


15,183



16,470



18,373

Investment securities


2,865



3,409



4,637

Capital stock of FHLB


1,128



1,133



1,091

Cash and cash equivalents


33



75



51

Total interest and dividend income


77,676



79,305



84,827










INTEREST EXPENSE:









FHLB advances


18,628



19,403



22,339

Deposits


9,849



10,480



12,787

Repurchase agreements


3,569



3,569



4,327

Total interest expense


32,046



33,452



39,453










NET INTEREST INCOME


45,630



45,853



45,374










PROVISION FOR CREDIT LOSSES


233



--



540

NET INTEREST INCOME AFTER









PROVISION FOR CREDIT LOSSES


45,397



45,853



44,834










OTHER INCOME:









Retail fees and charges


3,992



3,957



4,164

Insurance commissions


571



559



569

Loan fees


467



479



575

Income from bank-owned life insurance ("BOLI")


382



345



412

Other income, net


356



489



432

Total other income


5,768



5,829



6,152










OTHER EXPENSES:









Salaries and employee benefits


12,181



11,545



10,587

Occupancy


2,318



2,359



2,079

Information technology and communications


2,198



2,048



1,830

Regulatory and outside services


1,765



1,595



1,435

Deposit and loan transaction costs


1,526



1,519



1,230

Federal insurance premium


1,114



1,135



1,092

Advertising and promotional


1,032



1,257



910

Other expenses, net


2,607



2,676



2,904

Total other expenses


24,741



24,134



22,067

INCOME BEFORE INCOME TAX EXPENSE


26,424



27,548



28,919

INCOME TAX EXPENSE


8,861



9,812



10,130

NET INCOME

$

17,563


$

17,736


$

18,789

The following is a reconciliation of the basic and diluted earnings per share calculations for the periods noted.














For the Three Months Ended



December 31,


September 30,


December 31,



2012


2012


2011



(Dollars in thousands, except per share data)

Net income


$

17,563


$

17,736


$

18,789

Income allocated to participating securities (unvested restricted stock)



(60)



(43)



--

Net income available to common stockholders



17,503



17,693



18,789











Average common shares outstanding



147,881,207



150,661,205



161,921,133

Average committed ESOP shares outstanding



1,500



415,494



1,500

Total basic average common shares outstanding



147,882,707



151,076,699



161,922,633











Effect of dilutive restricted stock



--



--



4,351

Effect of dilutive stock options



102



1,895



3,743











Total diluted average common shares outstanding



147,882,809



151,078,594



161,930,727











Net earnings per share:










Basic


$

0.12


$

0.11


$

0.12

Diluted


$

0.12


$

0.11


$

0.12











Antidilutive stock options and restricted stock, excluded from the diluted average common shares outstanding calculation



2,471,473



2,006,979



897,136

Financial Condition as of December 31, 2012

Total assets decreased $139.5 million, from $9.38 billion at September 30, 2012 to $9.24 billion at December 31, 2012, due primarily to a $133.2 million decrease in the securities portfolio.  The decrease in the securities portfolio was due primarily to called and matured investment securities not being fully replaced.  Cash flows from the securities portfolio not reinvested during the quarter were used, in part, to pay dividends to stockholders, repurchase stock, and fund loan activity.  At December 31, 2012, Capitol Federal Financial, Inc., at the holding company level, had $233.8 million on deposit at the Bank.

The net loans receivable portfolio increased $32.0 million, or 0.6%, to $5.64 billion at December 31, 2012, from $5.61 billion at September 30, 2012.  The increase in the portfolio was due primarily to an increase in one- to four-family loans resulting largely from correspondent loan purchases outpacing principal repayments during the current quarter.  As of December 31, 2012, the Bank had 27 correspondent lending relationships located in 20 states.

Economic conditions in the Bank's local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans.  As of December 2012, the unemployment rate was 5.4% for Kansas and 6.7% for Missouri, compared to the national average of 7.8% based on information from the Bureau of Economic Analysis.  The unemployment rate remains low in our market areas, relative to the national average, due to diversified industries within our market areas, primarily in the Kansas City metropolitan statistical area.  Our Kansas City market area, which comprises the largest segment of our loan portfolio and deposit base, has an average household income of approximately $79 thousand per annum, based on 2012 estimates from the American Community Survey, which is a statistical survey by the U.S. Census Bureau.  The average household income in our combined market areas is approximately $68 thousand per annum, with 92% of the population at or above the poverty level, also based on the 2012 estimates from the American Community Survey. The Federal Housing Finance Agency price index for Kansas and Missouri has not experienced significant fluctuations during the past 10 years, unlike other market areas of the United States, which indicates relative stability historically in property values in our local market areas. 

As a portfolio lender focused on delivering outstanding customer service while acquiring quality assets, the ability of our borrowers to repay has always been paramount in our business model.  While we continue to evaluate the recently issued "qualified mortgage" rules by the Consumer Financial Protection Bureau, we currently anticipate that the impact to our overall book of business will generally be minimal.