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.  

The following table presents delinquent and non-performing loans, OREO and related ratios as of the dates shown.  In accordance with the OCC Call Report requirements, troubled debt restructurings ("TDRs") that were either nonaccrual at the time of restructuring or did not receive a credit evaluation prior to the restructuring and have not made six consecutive monthly payments per the restructured loan terms are reported as nonaccrual loans at December 31, 2012.  This reporting change occurred during the second quarter of fiscal year 2012, as it was the first quarter the Bank was required to file a Call Report.  During July 2012, the OCC provided guidance to the industry regarding loans that had been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender.  The OCC requires that these loans be reported as TDRs and nonaccrual, even if they are current.  Our balance of loans 90 or more days delinquent or in foreclosure continues to improve; however, implementation of the above noted OCC guidance has kept our balance of non-performing loans at a level similar to the prior year.  The principal balance of loans required by the OCC to be reported as nonaccrual, even if they are current, was $9.7 million and $12.4 million at December 31, 2012 and September 30, 2012, respectively. 














December 31, 2012


September 30, 2012


December 31, 2011


(Dollars in thousands)

Loans 30 to 89 days delinquent

$

23,201


$

23,270


$

25,707










Loans 90 or more days delinquent or in foreclosure


19,021



19,450



28,448

Nonaccrual loans less than 90 days delinquent(1)


9,706



12,374



--

Total non-performing loans


28,727



31,824



28,448

OREO


6,259



8,047



11,189

Total non-performing assets


34,986



39,871



39,637










ACL balance(2)


10,477



11,100



15,605










Non-performing loans to total loans


0.51%



0.57%



0.54%

Non-performing assets to total assets


0.38%



0.43%



0.42%

ACL as a percentage of total loans


0.19%



0.20%



0.30%

ACL as a percentage of total non-performing loans


36.47%



34.88%



54.86%

(1)

  Represents loans required to be reported as nonaccrual by the OCC regardless of delinquency status.  At December 31, 2012 this amount was comprised of $1.8 million of loans that were 30 to 89 days delinquent and $7.9 million of loans that were current.  At September 30, 2012, this amount was comprised of $1.2 million of loans that were 30 to 89 days delinquent and $11.2 million of loans that were current.

(2)

   In January 2012, management implemented a loan charge-off policy as OCC Call Report requirements do not permit the use of specific valuation allowances ("SVAs"), which the Bank was previously utilizing for potential loan losses, as permitted by the Bank's previous regulator.  As a result of the implementation of the charge-off policy, $3.5 million of SVAs were charged-off during the March 31, 2012 quarter, which accounts for the majority of the $5.1 million decrease in ACL between December 31, 2011 and December 31, 2012.

Total liabilities remained relatively unchanged, decreasing $3.0 million from September 30, 2012 to $7.57 billion at December 31, 2012.  A $31.8 million decrease in advance payments by borrowers for taxes and insurance resulting from the payment of real estate taxes and insurance on behalf of our borrowers was almost entirely offset by a $31.5 million increase in deposits.  The increase in the deposit portfolio was due primarily to a $49.7 million increase in the checking portfolio and a $32.0 million increase in the money market portfolio, partially offset by a $54.5 million decrease in the certificate of deposit portfolio.

Stockholders' equity decreased $136.5 million, from $1.81 billion at September 30, 2012 to $1.67 billion at December 31, 2012.  The decrease was due primarily to the payment of $114.3 million of dividends and the repurchase of $38.7 million of stock, partially offset by net income of $17.6 million.

The $114.3 million of dividends paid during the current quarter consisted of a $0.52 per share, or $76.5 million, True Blue® dividend, a $0.18 per share, or $26.6 million, special year-end dividend related to fiscal year 2012 earnings, per the Company's dividend policy, and a regular quarterly dividend of $0.075 per share, or $11.2 million.  The True Blue® dividend amount represented a portion of retained earnings from prior years.  On January 22, 2013, the Company declared a regular quarterly cash dividend of $0.075 per share, or approximately $11.0 million, payable on February 15, 2013 to stockholders of record as of the close of business on February 1, 2013.  Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, the Bank's regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

In December 2011, the Company announced that its Board of Directors approved the repurchase of up to $193.0 million of the Company's common stock.  The Company began repurchasing common stock during the second quarter of fiscal year 2012 and, as of December 31, 2012, had repurchased 15,906,384 shares at an average price of $11.80, or $187.6 million.  In November 2012, the Company announced its Board of Directors approved a new $175.0 million stock repurchase program to commence once the previous repurchase plan, under which $5.4 million remains available as of December 31, 2012, is completed.

The following table presents the balance of stockholders' equity and related information as of the dates presented.














December 31, 2012


September 30, 2012


December 31, 2011


(Dollars in thousands)

Stockholders' equity

$

1,669,951


$

1,806,458


$

1,931,309

Equity to total assets at end of period


18.1%



19.3%



20.5%

The following table presents a reconciliation of total and net shares outstanding as of December 31, 2012. 





 Total shares outstanding

152,115,857

 Less unallocated ESOP shares and unvested restricted stock

(5,385,199)

 Net shares outstanding

146,730,658

 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

 


December 31,


September 30,



2012


2012


ASSETS:







Cash and cash equivalents (includes interest-earning deposits of $69,236 and $127,544)

$

105,157


$

141,705


Securities:







Available-for-sale ("AFS") at estimated fair value (amortized cost of $1,226,591 and $1,367,925)


1,259,392



1,406,844


Held-to-maturity at amortized cost (estimated fair value of $1,974,115 and $1,969,899)


1,902,228



1,887,947


Loans receivable, net (of ACL of $10,477 and $11,100)


5,640,077



5,608,083


BOLI


58,394



58,012


Capital stock of FHLB, at cost


130,784



132,971


Accrued interest receivable


24,319



26,092


Premises and equipment, net


59,587



57,766


OREO


6,259



8,047


Other assets


52,589



50,837


TOTAL ASSETS

$

9,238,786


$

9,378,304









LIABILITIES:







Deposits

$

4,582,163


$

4,550,643


Advances from FHLB, net


2,532,493



2,530,322


Repurchase agreements


365,000



365,000


Advance payments by borrowers for taxes and insurance


23,818



55,642


Income taxes payable


9,079



918


Deferred income tax liabilities, net


23,267



25,042


Accounts payable and accrued expenses


33,015



44,279


Total liabilities


7,568,835



7,571,846









STOCKHOLDERS' EQUITY:







Preferred stock ($0.01 par value) 100,000,000 shares authorized; no shares issued or outstanding


--



--


Common stock ($0.01 par value) 1,400,000,000 shares authorized;

   152,115,857 and 155,379,739 shares issued and outstanding

    as of December 31, 2012 and September 30, 2012, respectively


 

1,521



 

1,554


Additional paid-in capital


1,266,918



1,292,122


Unearned compensation, ESOP


(46,832)



(47,575)


Retained earnings


427,942



536,150


Accumulated other comprehensive income, net of tax


20,402



24,207


Total stockholders' equity


1,669,951



1,806,458


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

9,238,786


$

9,378,304













Consistent with our goal to operate a sound and profitable financial institution, we actively seek to maintain a "well-capitalized" status for the Bank in accordance with regulatory standards.  As of December 31, 2012, the Bank exceeded all regulatory capital requirements.  The following table presents the Bank's regulatory capital ratios at December 31, 2012 based upon regulatory guidelines.















Regulatory





Requirement For



Bank


"Well-Capitalized"



Ratios


 Status

Tier 1 leverage ratio


14.7%


5.0%

Tier 1 risk-based capital


36.3%


6.0%

Total risk-based capital


36.6%


10.0%






A reconciliation of the Bank's equity under accounting principles generally accepted in the United States of America ("GAAP") to regulatory capital amounts as of December 31, 2012 is as follows (dollars in thousands):




Total Bank equity as reported under GAAP

$

1,378,261

Unrealized gains on AFS securities


(20,402)

Total Tier 1 capital


1,357,859

ACL


10,477

Total risk-based capital

$

1,368,336

Capitol Federal Financial, Inc. is the holding company for the Bank.  The Bank has 46 branch locations in Kansas and Missouri.  The Bank is one of the largest residential lenders in the State of Kansas.  News and other information about the Company can be found on the Internet at the Bank's website, http://www.capfed.com.

Except for the historical information contained in this press release, the matters discussed may be deemed to be forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies and other governmental initiatives affecting the financial services industry, fluctuations in interest rates, demand for loans in the Company's market area, the future earnings and capital levels of Capitol Federal Savings Bank, which would affect the ability of the Capitol Federal Financial, Inc. to pay dividends in accordance with its dividend policies, competition, and other risks detailed from time to time in documents filed or furnished by Capitol Federal Financial, Inc. with the SEC.  Actual results may differ materially from those currently expected.  These forward-looking statements represent Capitol Federal Financial, Inc.'s judgment as of the date of this release.  Capitol Federal Financial, Inc. disclaims, however, any intent or obligation to update these forward-looking statements.

Supplemental Financial Information

Loan Portfolio

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages (before deductions for undisbursed loan funds, unearned loan fees and deferred costs, and the ACL) as of the dates indicated.  The average rate of the portfolio decreased 11 basis points from September 30, 2012 and 49 basis points from December 31, 2011, to 4.04% at December 31, 2012.  The decrease in the average rates from September 30, 2012 and December 31, 2011 was due primarily to the endorsement of loans at current market rates, as well as to the purchase and origination of loans between periods with rates less than the average rate of the existing portfolio.



























December 31, 2012


September 30, 2012


December 31, 2011




Average


% of




Average


% of




Average


% of


Amount


Rate


Total


Amount


Rate


Total


Amount


Rate


Total


(Dollars in thousands)

Real Estate Loans:
























One- to four-family

$

5,429,556


3.99%


95.5%


$

5,392,429


4.10%


95.5%


$

5,003,708


4.49%


94.7%

Multi-family and commercial


46,815


5.62


0.8



48,623


5.64


0.9



52,524


6.15


1.0

Construction


60,975


3.92


1.1



52,254


4.08


0.9



58,869


4.35


1.1

Total real estate loans


5,537,346


4.00


97.4



5,493,306


4.11


97.3



5,115,101


4.51


96.8

























Consumer Loans:
























Home equity


144,121


5.39


2.5



149,321


5.42


2.6



160,029


5.46


3.0

Other


6,426


4.62


0.1



6,529


4.77


0.1



7,355


4.89


0.2

Total consumer loans


150,547


5.36


2.6



155,850


5.39


2.7



167,384


5.44


3.2


























Total loans receivable


5,687,893


4.04%


100.0%



5,649,156


4.15%


100.0%



5,282,485


4.53%


100.0%


























Less:

























Undisbursed loan funds


30,843







22,874









33,239







ACL


10,477







11,100









15,605







Discounts/unearned loan fees


21,864







21,468









20,315







Premiums/deferred costs


(15,368)







(14,369)









(11,616)







Total loans receivable, net

$

5,640,077






$

5,608,083








$

5,224,942







The following table presents the principal balance, weighted average credit score, loan-to-value ("LTV") ratio, and the average balance per loan for our one- to four-family loans at the dates presented.  Credit scores are typically updated during the last month of the quarter and are obtained from a nationally recognized consumer rating agency.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent bank appraisal or broker price opinion.  In most cases, the most recent appraisal was obtained at the time of origination.



































December 31, 2012


September 30, 2012


December 31, 2011





Credit





Average





Credit





Average





Credit





Average


Balance


Score


LTV


Balance


Balance


Score


LTV


Balance


Balance


Score


LTV


Balance


(Dollars in thousands)

Originated

$

4,024,920


763


65%


$

124


$

4,032,581


763


65%


$

124


$

4,030,538


763


65%


$

124

Correspondent purchases


650,115


764


65



336



575,502


761


65



326



440,721


760


64



301

Bulk purchases


754,521


748


67



317



784,346


749


67



316



532,449


740


60



254


$

5,429,556


761


65%


$

148


$

5,392,429


761


65%


$

147


$

5,003,708


761


65%


$

138

The following table summarizes the activity in the loan portfolio for the periods indicated, excluding changes in loans in process, deferred fees, and ACL.  Loans that were paid-off as a result of refinances are included in repayments.  Purchased loans include purchases from correspondent and nationwide lenders.  Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement.  During the current quarter, the Bank endorsed $253.3 million of one- to four-family loans, reducing the average rate on those loans by 107 basis points.  The endorsed balance and rate are, however, included in the ending loan portfolio balance and rate.


























For the Three Months Ended


December 31, 2012


September 30, 2012


June 30, 2012


March 31, 2012


Amount


Rate


Amount


Rate


Amount


Rate


Amount


Rate


(Dollars in thousands)

Beginning balance

$

5,649,156


4.15%


$

5,256,803


4.37%


$

5,275,296


4.45%


$

5,282,485


4.53%

Originations and refinances:
























Fixed


209,873


3.26



220,934


3.51



151,724


3.78



139,295


3.79

Adjustable


39,964


3.58



50,533


3.50



42,802


3.74



41,139


3.67

Purchases and Participations:
























Fixed


88,763


3.45



90,939


3.62



34,567


3.94



31,165


4.29

Adjustable


21,434


2.70



360,463


2.49



12,722


3.00



16,426


3.07

Repayments


(318,332)






(327,972)






(256,221)






(228,203)




Principal charge-offs, net(1)


(856)






(677)






(782)






(4,546)




Other(2)


(2,109)






(1,867)






(3,305)






(2,465)




Ending balance

$

5,687,893


4.04%


$

5,649,156


4.15%


$

5,256,803


4.37%


$

5,275,296


4.45%


(1)

Principal charge-offs, net represent potential loss amounts that reduce the unpaid principal balance of a loan.

(2)

Other consists of transfers to OREO, endorsement fees advanced and reductions in commitments.

Loan Originations

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity.  Loan originations, purchases and refinances are reported together.  The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years.  The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination.  




















For the Three Months Ended


For the Three Months Ended


December 31, 2012


December 31, 2011


Amount


Rate


% of Total


Amount


Rate


% of Total

Fixed-Rate:

(Dollars in thousands)

One- to four-family:

















<= 15 years

$

112,339


2.84%


31.2%


$

113,116


3.44%


33.7%

> 15 years


181,741


3.56


50.5



110,831


4.18


33.0

Multi-family and commercial real estate


3,850


5.00


1.1



--


--


--

Home equity


456


5.97


0.1



607


7.01


0.2

Other


250


8.01


0.1



444


6.87


0.1

Total fixed-rate


298,636


3.32


83.0



224,998


3.82


67.0


















Adjustable-Rate:

















One- to four-family:

















<= 36 months


2,069


2.25


0.6



2,759


2.57


0.8

> 36 months


42,139


2.70


11.7



75,617


3.17


22.5

Multi-family and commercial real estate


--


--


--



13,975


5.00


4.2

Home equity


16,766


4.83


4.6



17,336


4.83


5.2

Other


424


2.88


0.1



840


3.28


0.3

Total adjustable-rate


61,398


3.27


17.0



110,527


3.65


33.0


















Total originations, refinances and purchases

$

360,034


3.31%


100.0%


$

335,525


3.77%


100.0%


















Purchased and participation loans included above:

















Fixed-Rate:

















Correspondent - one- to four-family

$

84,913


3.38%





$

44,275


4.04%



Bulk - one- to four-family


--


--






392


3.25



Participations - commercial real estate


3,850


5.00






--


--



Participations - other


--


--






133


2.57



Total fixed-rate purchases/participations


88,763


3.45






44,800


4.03




















Adjustable-Rate:

















Correspondent - one- to four-family


21,434


2.70






19,363


3.16



Bulk - one- to four-family


--


--






19,868


3.55



Participations - commercial real estate


--


--






13,975


5.00



Total adjustable-rate purchases/participations


21,434


2.70






53,206


3.79




















Total purchased/participation loans

$

110,197


3.30%





$

98,006


3.90%



 

The following table presents the origination, refinance and purchase activity in our one- to four-family loan portfolio, excluding endorsement activity, for the quarters ended December 31, 2012 and 2011.  Refinances by Bank customers accounted for 47% of the one- to four-family loans originated during the current quarter.
















For the Three Months Ended


For the Three Months Ended


December 31, 2012


December 31, 2011







Credit







Credit


Amount


LTV


Score


Amount


LTV


Score


(Dollars in thousands)

Originations

$

122,516


75%


768


$

125,192


73%


764

Refinances by Bank customers


109,425


67


771



93,233


67


774

Correspondent purchases


106,347


69


768



63,638


66


771

Bulk purchases


--


--


--



20,260


60


763


$

338,288


70%


769


$

302,323


69%


769

The following tables present the annualized prepayment speeds of our one- to four-family loan portfolio, including construction and non-performing loans, for the quarters ended December 31, 2012 and September 30, 2012.  The terms presented in the tables below represent the original terms for our fixed-rate loans, and current terms to repricing for our adjustable-rate loans.  Loan refinances are considered a prepayment and are included in the prepayment speeds presented below.  The annualized prepayment speeds are presented with and without endorsements.  











December 31, 2012






Prepayment Speed (annualized)




Principal


Including


Excluding

Term



Balance


Endorsements


Endorsements



(Dollars in thousands)





Fixed-rate one-to four-family loans:








15 years or less


$

1,087,793


34.9%


20.3%

More than 15 years



3,214,118


43.4


17.8




4,301,911


41.2


18.4









Adjustable-rate one-to four-family loans:








36 months or less



869,767


16.3


14.2

More than 36 months



305,129


23.3


15.7




1,174,896


18.1


14.6

Total one-to four-family loans


$

5,476,807


36.3%


17.6%











September 30, 2012






Prepayment Speed (annualized)




Principal


Including


Excluding

Term



Balance


Endorsements


Endorsements



(Dollars in thousands)





Fixed-rate one-to four-family loans:








15 years or less


$

1,059,422


29.7%


19.8%

More than 15 years



3,189,398


34.8


19.4




4,248,820


33.5


19.5









Adjustable-rate one-to four-family loans:








36 months or less



887,491


21.4


17.6

More than 36 months



298,236


31.5


22.1




1,185,727


23.9


18.7

Total one-to four-family loans


$

5,434,547


31.4%


19.3%


Asset Quality

The following tables present loans 30 to 89 days delinquent, non-performing loans, and OREO at the dates indicated.  Unless otherwise noted, correspondent purchased loans are included with originated loans and bulk purchased loans are reported as purchased loans.  Non-performing loans are loans that are 90 or more days delinquent or in foreclosure or nonaccrual loans less than 90 days delinquent, which are loans that are required to be reported as nonaccrual pursuant to OCC Call Report requirements.  Management believes that it is unlikely the balances of loans 30 to 89 days delinquent, non-performing loans, and OREO will decrease significantly from their current levels, and will likely stay within a range seen during the past year.























Loans Delinquent for 30 to 89 Days at:



December 31, 2012


September 30, 2012


June 30, 2012


December 31, 2011



Number


Amount


Number


Amount


Number


Amount


Number


Amount


Loans 30 to 89 Days Delinquent:

(Dollars in thousands)


One- to four-family:





















Originated

156


$

15,182


142


$

14,178


131


$

13,060


164


$

15,770


Correspondent

2



243


3



770


7



1,598


5



2,395


Purchased

35



6,622


39



7,695


37



8,463


40



6,799


Consumer Loans:





















Home equity

42



966


28



521


31



526


38



518


Other

10



188


16



106


13



128


12



225



245


$

23,201


228


$

23,270


219


$

23,775


259


$

25,707


30 to 89 days

   delinquent

   loans to total

   loans receivable,

   net




0.41%





0.41%





0.46%





0.49%

























Non-Performing Loans and OREO at:



December 31, 2012


September 30, 2012


June 30, 2012


December 31, 2011



Number


Amount


Number


Amount


Number


Amount


Number


Amount



(Dollars in thousands)


Loans 90 or More Days Delinquent or in Foreclosure:





















One- to four-family:





















Originated

83


$

7,395


86


$

7,885


92


$

8,998


106


$

13,161


Correspondent

6



815


5



722


2



328


4



653


Purchased

43



10,378


43



10,447


47



11,792


50



14,106


Consumer Loans:





















Home equity

21



357


19



369


21



505


26



520


Other

14



76


4



27


5



20


5



8



167



19,021